Vildirect: IncomeTax-caselaws-1975-VIL-447-MAD-DT

1975-VIL-447-MAD-DT

Equivalent Citation: [1976] 104 ITR 245

MADRAS HIGH COURT

Date: 29.04.1975

COMMISSIONER OF INCOME-TAX

P. NATARAJA SASTRI

BENCH

Judge(s) : V. RAMASWAMI., V. SETHURAMAN

JUDGMENT

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the director's remuneration of Rs. 500 per month for the first ten months of the accounting year relevant to the asst. yr. 1963-64 waived by the assessee after the said ten months was not liable to be assessed in the asst. yr. 1963-1964 ? "

5. The learned counsel appearing for the Revenue submitted that this was a case where the income had accrued to the assessee month after month, that the absence of any credit entry in his favour in the books of the company was immaterial and irrelevant and that the subsequent waiver by the assessee did not affect its taxability on the ground of accrual. He further submitted that the decision followed by the Tribunal related to a case of managing agency and that the remuneration in that case was governed by an agreement which was modified retrospectively, He drew our attention to the decision of this Court in Kothandaraman vs. CIT [1966] 62 ITR 348 (Mad) as completely supporting his submission. For the assessee, learned counsel argued that the income having been waived the amount was not at all assessable in the assessee's hands, that the accounts of the company supported the stand of the assessee and that it would be wrong to tax him on income which had not accrued to him. He also relied on the principle that the assessee could be taxed only on the real income earned by him.

6. The decision in Kothandaraman vs. CIT has considered all the earlier decision on the point including those relating to managing agencies. In that case, the assessee was entitled to a monthly remuneration of Rs. 1,250 plus a commission at the rate of five per cent. on the net profit of the company as its managing director. The commission was due and payable yearly, while he was entitled to draw monthly remuneration every month. For the accounting year ending with 31st December, 1959, the company credited the assessee with a remuneration of Rs. 1,250 per month, but on 31st December, 1959, the entries were reversed and the assessee was debited with a sum of Rs. 15,000 which represented the salary for the relevant year. This was because of the company not making any profit and because of the resolution of the company deciding to stop payment of remuneration of Rs. 15,000 per annum to the managing director for the year 1959. The ITO assessed the assessee on the said sum of Rs. 15,000. The assessment was confirmed on appeal. On a reference this Court held that, even if the resolution which was passed on 9th March, 1960, for the relevant accounting year was to be read as having the effect of denying the salary during the earlier period or even if it was to be taken as the assessee having waived the accrued remuneration, such denial, withdrawal or waiver accrued subsequent to the assessment year and that it would be ineffective in the computation of the income for the assessment year under reference in that case. It was pointed out that though the book entries were not necessarily conclusive, they did show the accrual of salary from month to month for the period in question.

7. The principle of this decision is that, where income had accrued already too a director or managing director, then no waiver of the remuneration or any denial thereof would have the effect of affecting the taxability of the said sum. The entry in the accounts is of neutral consequence, except perhaps as a piece of evidence. In the case of managing agency, which is governed by an agreement, the position would be absolutely different. It is possible for the parties to meet and to agree to modify the agreement either prospectively or retrospectively. If there is a retrospective modification of the agreement, then to the extent that there has been a reduction of denial of the managing agent's remuneration the income could not be said to have accrued. This was the principle that was decided by the Supreme Court in CIT vs. Shoorji Vallabhdas & Co. This decision was subsequently considered and explained by the Supreme Court itself in Morvi Industries Ltd. vs. CIT [1971] 82 ITR 835 (SC). After referring to the decision in CIT vs. Shoorji Vallabhdas & Co., the Supreme Court pointed out that in the case before them, the amounts of income were given up unilaterally after they had accrued to the appellant-company, so that it could not escape liability to tax. In the case before the Supreme Court the assessee was entitled to remuneration under the managing agency agreement for the years 1954 and 1955. For the relevant years the assessee relinquished the commission, and the question was whether the relinquishment affected the taxability of the amount that had already accrued. The Supreme Court upheld the assessment on the ground that the income having accrued was liable to tax, even if it was subsequently waived. The waiver in such a case would only be an application of the income. It is this principle which applies here.

8. Applying the principle of the decision cited above, we are satisfied that in the present case the income was rightly brought to tax by the ITO, as it had already accrued and as it was waived only after it had accrued.

9. In the result, we answer the question referred in the negative and in favour of the Department. The Department will be entitled to its costs. Counsel's fee Rs. 250.

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