TMI Blog2002 (11) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... y were determined. The board of directors having decided to forgo the said remuneration, much prior to the said date, the contention of the Revenue that right to receive remuneration accrued from month to month and the assessee had relinquished his right to claim the remuneration after it had become due, is without any substance. - - - - - Dated:- 22-11-2002 - Judge(s) : D. K. JAIN., MS. SHARDA AGGARWAL. JUDGMENT The judgment of the court was delivered by D.K. JAIN J.- In these two cross references, arising out of I.T.A. No. 2969 of 1976-77, the Income-tax Appellate Tribunal (for short "the Tribunal"), has referred under section 256(1) of the Income-tax Act, 1961 (for short "the Act"), the following questions for our opinion: R.A. No. 1339 (Delhi) of 1980--at the instance of the Commissioner "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in recalling its earlier order dated August 30, 1978, and in directing that the matter regarding the taxability of the directors' remuneration from Modipon Ltd. should be decided afresh?" R.A. No. 546 (Delhi) of 1978-79-at the instance of the assessee: "(i) If the answer to the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese regulations." On the basis of the said article, the Income-tax Officer formed an opinion that the assessee was entitled to a remuneration at one per cent. of the net profits of the said company, Since no remuneration from the said company had been declared by the assessee, the Income-tax Officer required him to explain as to why remuneration in terms of the said article should not be included in his total income. Objecting to the proposed addition, the assessee relied on the following resolution of the board of directors of Modipon passed in its meeting held on July 17, 1972: "Resolved that the directors do not charge any remuneration whatsoever in respect of this year, i.e., the year ending February 28, 1973, in the larger interest of the company's business. Further resolved that this shall not constitute any precedent whatsoever and directors may charge remuneration in the next year." It was explained that since much prior to the close of the previous year on February 28, 1973, the board of directors had decided on July 17, 1972, not to charge any remuneration in the interests of the company's business, no income by way of remuneration was taxable in his hands. A cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said article, an approval of the Central Government was necessary. It also felt that article 111(2) did not create a contract between the company and the directors and in any case without the approval of the Central Government, the said article could not be made operative. Relying on the decisions of the apex court in E.D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 and CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42, the Tribunal took the view that the net profits of Modipon for the year ending February 28, 1973, could be determined only on that date and, therefore, the remuneration to the directors would arise only on February 28, 1973, after the profits of the company were determined. The Tribunal held that since the amount of remuneration was forgone by the directors even before the right to receive the same had accrued, no remuneration had accrued to the assessee and the assessee was thus, not liable to pay any tax on the same. Thus, in the second round the Tribunal affirmed the view taken by the Appellate Assistant Commissioner. On the Revenue and the assessee moving applications under section 256(1) of the Act, the aforenoted questions have been referred. We have heard lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ify under section 254(2) of the Act. On the scope of sections 154 and 254(2) of the Act, learned counsel has placed reliance on the decisions of this court in CIT v. K.L. Bhatia [1990] 182 ITR 361; Ms. Deeksha Suri v. ITAT [1998] 232 ITR 395; Karan and Co. v. ITAT [2002] 253 ITR 131; Hotz Hotel Pvt. Ltd. v. CIT [2001] 248 ITR 647 and mt. Baljeet Jolly v. CIT [2001] 250 ITR 113. On the merits of the addition, Mr. Pandey would submit that the right to receive remuneration having accrued to the assessee in terms of article 111(2) of the articles of association and till the said article was changed in the manner provided in section 31 of the Companies Act, the assessee could not be divested of his right to receive remuneration. It is urged that the articles of association having not been changed by a special resolution, in the general meeting of the shareholders, the resolution passed by the board of directors on July 17, 1972, forgoing their remuneration, was non est in the eye of law. It is asserted that article 111 being in the nature of a contract between Modipon and the assessee, is binding on the parties and without changing the same in accordance with the procedure prescribed, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een expressed by the apex court in a recent decision in CIT v. Hero Cycles Pvt. Ltd. [1997] 228 ITR 463, wherein it is again said that for invoking jurisdiction under section 154 of the Act, for exercising power of rectification of mistake, it is a condition precedent that the mistake must be "glaring and obvious". Applying the aforenoted principles, governing an application under section 254(2) of the Act, we are of the opinion that the Tribunal was justified in recalling its order dated August 30, 1978, on the ground that while deciding the appeal, it had admittedly relied on a wrong section, which had no application to the year under appeal. We do not find any illegality in the observation of the Tribunal that it was difficult for them to say to what extent reliance on a wrong section had affected the mind of the Tribunal. Obviously, reliance on a wrong provision of law is tantamount to an error apparent from the record within the meaning of the said section. Accordingly, the question referred at the instance of the Commissioner in R.A. No. 1339 (Delhi) of 1980 is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. We now take up the main qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt until the said contingency has happened." At the same time, however, computation of such income is to be made in accordance with the method of accounting regularly adopted by the assessee. It may be cash system, i.e., actual receipt or mercantile system, where entry is made on accrual basis, i.e., accrual of right to receive payment. Therefore, when an assessee maintains his accounts on mercantile system what has to be seen is whether income can be said to have really accrued to him or not. As noted above, if the income has accrued, it is taxable in the year of accrual irrespective of the fact whether he has received the same or not. In State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), while observing that the concept of reality of the income and the actuality of the situation are relevant factors, which go to the making up of the accrual of income, their Lordships of the Supreme Court said that whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of real income theory but it would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee. What has really ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." In Godhra Electricity Co. Limited v. CIT [1997] 225 ITR 746, their Lordships of the Supreme Court said that the afore-extracted principle laid down in Shoorji Vallabhdas's case [1962] 46 ITR 144 (SC) is applicable whether the accounts are maintained on cash system or under the mercantile system. If the accounts are maintained under the mercantile system, what has to be seen is whether income can be said to have really accrued to the assessee. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he board or a committee thereof, attended by any such director and the amount of such fee after such increase does not exceed two hundred and fifty rupees." The section provides that any provision relating to the remuneration of any director, including a managing or whole-time director or any amendment of any provision relating to such remuneration, which increases or has the effect of increasing such remuneration, should be sanctioned by the Central Government, in the case of a public company or a private company which is a subsidiary of a public company. If the increase is not sanctioned by the Central Government, it shall be regarded as void. In the said section any provision relating to the remuneration of any director is considered to have the effect of increasing such remuneration if it provides for a payment beyond the sitting fee of Rs. 250. In support of his stand that the approval of the Central Government was required for payment of the said remuneration, learned counsel for the assessee has referred us to a clarification issued by the Company Law Board under section 310 of the Companies Act in the year 1966. The clarification reads as under: "369/Section 310--Remu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and, as pointed out in the written submissions, it was only by virtue of a special resolution passed by the company on November 30, 1968, it was resolved to start paying remuneration at one per cent. of the net profits of the company to its directors, in terms of article 111, subject to the approval of the Central Government. Any further payment, in addition to the sitting fee, under the article did require the approval of the Central Government, which admittedly had not been applied for. The view we have taken also finds support from various letters exchanged between Modipon and the Company Law Board. Vide their letter dated May 4, 1977, the Department of Company Affairs, Ministry of Law, justice and Company Affairs, had informed the company that in view of the proviso to sub-section (4) of section 309 of the Companies Act, which was only an enabling provision and should be read with section 310 of the Companies Act, the approval of the Central Government would be required for the payment of one per cent. commission, as it would amount to increase in remuneration of the directors. At this juncture, we may also note that Mr. Pandey, learned counsel for the Revenue, had submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing the principle laid down in Sassoon's case [1954] 26 ITR 27 (SC), their Lordships observed that profits do not accrue from day-today or even from month to month and have to be ascertained by a comparison of assets at two stated points. Unless the right to profits comes into existence, there is no accrual of profits and the destination of the "profits must be determined by the title thereto on the day on which they arise". As noted above, remuneration at one per cent. of the net profits of the company was to be determined in the manner laid down in the Companies Act. For the assessment year 1973-74, the company closed its accounts on February 28, 1973, and, therefore, the question of payment of the remuneration to the directors, based on the net profits in terms of the said article could arise only on February 28, 1973, or thereafter, when the net profits of the company were determined. The board of directors having decided to forgo the said remuneration, much prior to the said date, the stand of learned counsel for the Revenue that right to receive remuneration accrued from month to month and the assessee had relinquished his right to claim the remuneration after it had bec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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