# NONSUCH ESTATE LTD v. THE COMMISSIONER OF INCOME-TAX, MADRAS November 21. 1974

- **Citation:** [1975] 2 S.C.R. 806
- **Court:** Supreme Court of India
- **Decided:** 1975
- **Bench:** H. R. Khanna, A. C. Gupta
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/nonsuch-estate-ltd-v-the-commissioner-of-income-tax-madras-november-21-1974-6252
- **Pages:** 5

## Headnote

lncome-taJ: Act, 1922-ASJfe.rsee followed mercantile system of acco11nti111Debited in boob each year managing ~·ency remuneration for three yearClaimed 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 Commilaioner 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. Section _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.
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NONSUCH ESTATE v. c.u. (Gupta, /,)
8 07

## Text

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 acco11nti111Debited in boob each year managing ~·ency remuneration for three yearClaimed 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 Commilaioner 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. Section _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 are these. The managing agents of the Company were entitled . to commission at the rate of
l i per cent on all sales of tea and other produces of the Company and
a further sum of Rs. 12,000/- per annum for secratarial work.
There
was, however, no written agreement embodying the terms.
After the
Companies Act, 1956 came into force on April l, 1956 it was decided
that there should be a fresh managing agency agreement between the
Company and its managing agents in conformity with the provisions of
the said Act. A fresh agreement drawn up and submitted by the
managinig agents. was approved by the Company.
The new agreement proposed the reappointment of M/s. Harrisons & Crosfield
Limited as the managing agents of the Company for a period of 10
yea.ts on a remuneration of 5 per cent commission on the net profits
of the Company computed in the manner laid down in sections 349
to 351 of the Companies Act, 1956 subject to a minimum remuneration of Rs. 12,000/~ per annum.
The revised terms were to· take
effect from April 1, 1956. As required by sec. 326 of the Companies
i' Act, the new agreement was sent to the Central Government for approval by a communication dated August 3, 1957 enclosing a formal
application for the purpose in Form 25, On September 2, 1957 by·
a letter addressed to the Company the Govcri;ment conveyed·· its
approval to "the appointment of ~/s. H~rris~ns & Crosfi~lds Ltd.
as the Managing agents ........ for a period of 10 years with effect
G
from 1st April 1956, on a remuneration of 5 per cent commission on
the net profits of the Company comouted in the manner as laid down
in Sections 349 to 351 of the Comoanies Act, 1956 subject to a
minimum remuneration of Rs. 12,000/- (Rupees twelve thousand
only) per annum paiyable to fhe Managing Agents, in the event of
absence or inadequacy of profits in anv financial year." On rPceiot of
the aporoval, the Comoany by a resolution adopted at an extraordinarv ·general meeting of its shareho1ders held on October 4. 1957
reappointed M/s. Harrisons & Crosfield Limited on the terms stated
above. In terms of the new a1?Teement the exi~ting a!!encv a!!l'CemP.nt
between th parties stood cancelled with the expiry of March 31, 1956.
808
· SUPJ\l!ME COURT REPORTS
[1975] 2 ~.c.n.
The Company follows the mercantile system of accounting. JFor
the penod April 1, 1\1:>6 to June jU, 1\156, me Company crt:U1ted a
sum ot Rs. 'JJ20/- to the account of the nLmagmg agents as ttteir
remunerauon m accordance with the terms of tne prvposeo new agrCC""
ment.
TlllS was disclosed in the published accounts of the Compimy
for the year July 1, 1955 to June 30, 1956 relevant to the assessmi~nt
year 1957-58. For the purpose of assessment of income-tax, howeYer, · &
the Company added bacK me said sum or Rs. 9,320/- to its taxable
incom.:. In the next accounting year ending on June 30, 1957 relevant to the assessment year l\l:>~-59 the same prncess was followed
with regard to the remuneration payable to the managlllg agents. For
the assessment year 19:i9-60 for wruch the previous year was July 1,
1957 to June: 30, 1958, a total sum of Rs. 97,188/- was shown as
managing agents' remuneration payable during that year. This amo1mt
was made up as under :
·
"Proportionate remuneration for 3 months at 5
per cent: on the net profits for the period ending
on 30-6·1956 paid during the
year ending on
Amount
30-6-1958
9,320
Remuneration at 5 per cent on the net profit
of the year ending on 30th Jun€: 1957 paid during
the year entling on 30-6-1958
71,3,6S
Managing Agents expenses for the year ending
30th June 1957 recouped during the year ending
on 30th June 1958
.
.
·
.13,200
Proportionate Managing Agent's expenses for the
year ending on 30th June 1956 recouped during
the year ending on 30-6-1958
3,300
97,188
Though this sum did not pertain to the previous year relevant to
the assessment year 1959 60, the Company claimed it as deductible
F
expenditure for that year on the ground that the sum became payable
only during that year when the Government accorded its approval 1to
the new agreement. The Income-tax Officer rejected this claim on
the view that the approval of the Central Government was necessa11
only for actual payment and "the assessee should have ascertained
the liability for each year and claimed it on the mercantile basis
which was the system adopted by the assessce company." The Appela
late Assistant Commissioner and the Tribunal also took the same view.
The High Court answered the question referred to it ag'<linst the asse:1see on the following reasoning :
" . . . . . ... There was undoubtedly an
understanding
between the managing agency and the assessee as to the new
terms of remuneration which actually were given effect to by
making debit entries in the remuneration account then and
H
there. It is true that at the time the: debit entries were made,
approval of the Central Government had not come. But
when it ciune actually later, it gave legal effect to the debit
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NONSUCH ESTATE v. c.r.T. (Gupta, /,)
809
entries, not from the date of the approval but from April l,
1956. That being the case, the refusal of the deductioDJ, in
our opinion was right."
·
In our judgment the High Court was .in error in answering the
q\)estion referred to it against the assessee. It appears that the In·
come-tax authorities, the Tribunal and the High Court all laid special
emphasis O!l the fact that the Company followed the mercantile system
of accounting.
The distinction between the two methods of account·
ing, one on the cash basis and the other on the mercantile basis is
well-known. In Commissioner of Income-tax, Madras v. A. Gajapathy
Naidu ( 1) , this Court explained the difference between the two methods
quoting with approval an extract from a Judgment of the Allahabad
High Court in Commissioner of · Income-tax v. Singari Bai(2). In
Gajapathy Naid.u's( 1) case this Co~rt said:
·
"It is commonplace that there are two principal methods
of accounting for the inc,ome, profits and gains of a business
one is the cash basis and the other, the mercantile basis.
The latter system of accountancy "brings into credit what is
due immediately it becomes legally due and before it is actuD
ally received; and it brings into debit expenditure the amount
for which a legal liability has been incurred before it is actually disbursed"."
'
However, even an as~essee following the mercantile system of accounting is not entitled to claim a deduction until liability for the sum
for which deduction is claimed has accrued.
The reasons given by
E · the High Court overlook the plain terms of sec. 326 of the Companies
Act, 1956. Sec. 326 so far· it is material for the question involved in
this case, is in these terms :
"Sec. 32~. (1) In respect .of any company ........... .
(a) ......... .
(b) unless the approval of the Central Government has
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been obtained for such appointment or re-appointment.
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( 2) The Central Government shall not accord its approval
under sub-section ( 1) in
any
case,
unless it is
satisfied-
( a) that it is not against the public interest to allow the
company to have a managing agent;
(b) that the managing agent proposed is, in the opinion,
a fit and proper person to be appointed or re-appointed as such, and that the conditions of the managing
agency agreement proposed are fair and reasonable;
and
( c) that the managing agent proposed has fulfilled any
conditions which the Central Governmerti requires
him to fulfil."
(1) 53 I.T.R. 114.
5-L34SSupCI/75
(2) 13 I.T.R. 224.
' 810
SUPREME COURT REPORTS
[1975] 2 s.c.R.
Section 326 prohibits the appointment or re-appointment of
a
managing agent unless the Central Government approved such appointment or re-appointment. The Central Government would not accord
its approV'al unless the requirements specified in clawses (a), (b) a.nd
(c) of sub-section (2) of the section have been fulfilled.
Therefore,
it can.not be· assumed that the Central Government will approve· every
proposed appointment or re-appointment of a managing agent. Thus
in the instant case it is only when ~he Central Government conveyed
its approval to the appointment of M/s. Harrisons and Crosfield Limi1ted
as managing agents by its letter dated September 2, 1957 that the
appointment became effective and the Company's liability to pay the
remuneration of the managing agents accrued. The position here is
not that the liability had arisen earlier and its quantification only depended on the approval of the Central Government. It is true that
the liability became effective from April 1, °1956, a date anterior to the
relevant previous year, . but that is b1:c11use the Central Governm1!nt
chose to giv(: its approval retrospective operation. The Hability in
these circumstances cannot be said to have· arisen from any date priior
to September, 2, 1957 when the approval was given as sec. 326 contains un absolute prohibition against the appointmevt or re-appointment of a managing agent before the approval of the Central Government was .obtained.
In our opinion, the position is quite clear fwm
the terms of sec. 326 and we do not 1:onsider it necessary to refer to
the authorities cited by the learned counsel for either side.
The appeal is accordingly allowed, the answer given by tfle High
Court to the question referred to it is discharged and tlie question is
answered
in the affirmative and
in favour of the asseS1H:e.
The appellant will be entitled to its costs in this Court and in the High
Court.
P.E.R.
Appeal allow£!d,
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