In the case of Commissioner of Income-tax Vs. Seshasayee Bros. (P.) Ltd. (239ITR471) the assessee who entered into a managing agency agreement was entitled to claim remuneration at a certain percentage, on a sliding scale, from the profit of the company as computed under the provisions of sections 349 to 351 of the Companies Act, 1956. The assessee-company was entitled to a minimum remuneration of Rs. 30,000. The assessee-company entered into another agreement with another party and there also the assessee was entitled to claim remuneration of 10 per cent. of the net profit in addition to a minimum remuneration of Rs. 12,000 per annum. Under the agreement the additional remuneration could be drawn by the assessee only after the audited balance sheet and profit and loss account of the relevant year were placed before the general body meeting and approved by the general body meeting. According to the Assessing Officer, the additional remuneration became due to the assessee and it was assessable in the year in which the minimum remuneration was payable and the fact that it was paid subsequently was not a relevant consideration. The Tribunal allowed the appeal of the assessee. The Madras High Court held that the additional remuneration became due only after the audited balance sheet and profit and loss account of the company were laid before the company’s general body meeting and approved by the same. Since the additional remuneration was based on the profit, unless the amount of profit was known, it was not possible to hold that the additional remuneration accrued at the end of the relevant accounting year.
Directors including managing directors, apart from a fixed monthly remuneration are often entitled to certain commission as percentage of net profits as additional remuneration. Such commission is though provided in accounts of the preceding year but the payment of the same is made subject to the approval of accounts in the general meeting. On this basis such commission is both made subject to tax deduction at source at the time of payment in the succeeding year. Further the director concerned offer such sum to tax in the previous year in which the same is received even though the employer take a deduction of the same in the immediately preceding year. The assessing officer in such cases often attempt to tax such commission in the preceding year in which a deduction is claimed by the employer. Any such action can be challenged on the basis of the ruling of the Madras High Court.