TMI Blog1974 (11) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... gment of the court was delivered by GUPTA J.-- This is an appeal by special leave from a judgment of the Madras High Court in a reference under section 66(1) of the Indian Income-tax Act, 1922. The appellant, Nonsuch Tea Estate Ltd., is a public limited company incorporated in the year 1924, under the Indian Companies Act, 1913. The appellant, referred to hereinafter as the company, derives its income from tea grown in its estate, for which it is assessed to income-tax. M/s. Harrisons and Crosfield Ltd. have been the managing agents of the company from the beginning. The following question relating to the assessment year 1959-60 was referred to the High Court. "Whether, on the facts and, in the circumstances of the case, the sum of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication for the purpose in Form 25. On September 2, 1957, by a letter addressed to the company the Government conveyed its approval to "the appointment of M/s. Harrisons Crosfield Ltd. as the managing agents.........for a period of 10 years with effect from 1st April, 1956, on a remuneration of 5 per cent. commission on the net profits of the company computed in the manner as laid down in sections 349 to 351 of the Companies Act, 1956, subject to a minimum remuneration of Rs. 12,000 (rupees twelve thousand only) per annum payable to the managing agents, in the event of absence or inadequacy of profits in any financial year". On receipt of the approval the company by a resolution adopted at an extraordinary general meeting of its sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the year ending on June 30, 1958 71,368 Managing agents' expenses for the year ending June 30, 1957, recouped during the year ending on June 30, 1958 13,200 Proportionate managing agents' expenses for the year ending on June 30, 1956, recouped during the year ending on June 30, 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 expenditure for that year on the ground that the sum became payable only during that year when the Government accorded its approval to the view agreement. The Income-tax Officer rejected this claim on the view that the approval of the Central Government was ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the Allahabad High Court in Commissioner of Income-tax v. Smt. Singari Bai. In A. Gajapathi Naidu's case this court said: "It is common place that there are two principal methods of accounting for the income, 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 actually 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 assessee following the mercantile system of accounting is not entitled to claim a deduction until liability for the sum for which deduction is claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Harrisons and Crosfield Ltd. 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 because the Central Government chose to give its approval retrospective operation. The liability in these circumstances cannot be said to have arisen from any date prior to September 2, 1957, when the approval was given as section 326 contains an absolute prohibition agai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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