Holding

The commission, although expended on annuity policies, accrued to the managing directors and is taxable as salary under Section 17 of the Income Tax Act, 1961.

Summary

The Supreme Court examined whether commissions payable to managing directors of Sarangpur Mills, which were used to purchase deferred annuity policies, should be treated as taxable salary under Section 17 of the Income Tax Act, 1961. The Board of Directors had passed resolutions directing that the commissions be expended on the policies, but the directors did not receive any immediate benefit. The Revenue argued that the commissions accrued to the directors and therefore formed part of their remuneration, while the directors contended that the amounts were diverted before accrual. The Court held that the resolutions merely directed the use of the accrued commissions and did not extinguish the directors' right to the commissions, which therefore accrued to them at the end of the financial year. Consequently, the amounts are includable in the directors' income from salaries. The civil appeals filed by the Revenue were allowed, overturning the Tribunal and High Court decisions.

Issues considered

Whether the amount of commission expended on deferred annuity policies is includable in the assessee's income under the head Salaries.
Whether the Board resolutions and agreement clause 6(e) effectively deny the accrual of that commission to the managing directors.

Legislation cited

Income Tax Act, 1961s. 17

Subjects

Income TaxSalaryCommissionDeferred AnnuityRemunerationAccrualSection 17Managing DirectorCorporate Resolution

Judgment

A COMMISSIONER OF INCOME TAX, GUJARAT-I
v.
NA VNIT LAL SA KAR LAL ETC.

NOVEMBER 15, 2000 j.· ....
B (S.P. BHARUCHA AND D.P. MOHAPATRA, JJ.]

Income Tax Act, 1961-Section 17-Commission payable to employee-
Assessee expended in purchase of Deferred Annuity Policy from life Insurance
Corporation by the employer for the benefit of assessee-Whether includib/e
c in the hands of assessee as income chargeable under the head Salaries-
Held, yes.
Assessee-respondents are Managing Directors of employer-company.
Under the terms of agreement, they are entitled to remuneration. Later, a
resolution was passed by the Board of Directors of the company to expend the
D commission payable to the assessees in purchase of Deferred Annuity Policies
from Life Insurance Corporation on the life of the concerned assessees. The
Income Tax Officer included the amounts expended under the head Salaries
in their assessments for the reason that the payment was made out of the
remuneration payable to the assessees. In appeal, the Appellate Assistant
Commissioner agreed with the Income Tax Officer while the Tribunal and "'"
E
the High Court accepted the contention of the assessees. Hence these appeals
by the Revenue.
The assessees contended that the amount expended for purchase of
annuities did not form part of remuneration payable to them as per the ~
-
agreement entered into and, therefore, they are not includible as part of
F
Income from salary. The assessees further contended that the resolutions
must be so read as to deny the obligation to pay to·the assessees that particular
part of their remuneration utilised in purchase of policies and, therefore, there

G
was no accrual to them.
Allowing the appeals, the Court --
HELD: The Resolutions set out the format of Resolutions to be passed
by the Extraordinary General Meetings of the Mills; they are exactly the same
terms. The resolutions do not refer to the clauses of the Agreements. They
do not say that the Managing Directors shall not be paid any remuneration
or any part of such remuneration. In fact, they refer specifically to the
H 652

-
C.l.T. v. NAVNIT LAL SAKAR LAL [BHARUCHA, J.] 653

"amount of commission payable to each of the Managing Directors" and A
resolve that that commission payable to each of the Managing Directors shall
be "expended in the purchase of annuity policies on the life of the concerned
managing director". It is impossible, in the circumstances, to conclude that
the amounts of the commission that were expended to purchase the policies
had been diverted and had not accrued to the Managing Directors. A proper B
construction would be that such commission had accrued to them at the end
of tiJe relevant financial years and that thereafter the sums thereof were
resolved to be spent to purchase annuity policies for each ofthem. (657-C-E}

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7723 of 1997.

From the Judgment and Order dated 10.7.96 of the Gujarat High Court C
in M.C.A. No. 17 of 1996.
WITH
Civil Appeal Nos. 7724-26of1997.

From the Judgment and Order dated 13.7.93 of the Gujarat High Court D
in l.T.R. Nos. 445/80, 212 and 213of1982.

Ranbir Chandra, Ms. Sushma Suri and Shail Kumar Dwivedi for the
Appellant.

S.K. Dholakia, M.N. Shroff and Chirag M. Shroff for the Respondents.
E
The Judgment of the Court was delivered by

BHARUCHA, J. We are concerned with the Assessment Years 1973-74
and 1974-75 in these appeals. Common questions of law arise. They read:

"I. Whether the amount of Rs. 26,221 being I/3rd of the sum of Rs.
78,663 paid to Life Insurance Corporation by Sarangpur Mills for F
purchase of Deferred Annuity Policy is includible in the hands of the
assessee as income chargeable under the head Salaries?

2. Whether on the facts, circumstances and the evidence on record,
the Income-tax Appellate Tribunal was right in law in coming to the
conclusion that the amount of Rs. 26,221 utilised by Sarangpur Mills G
towards purchase of Single Premium for obtaining the Deferred
Annuity Policy did not form part of remuneration payable to the
assessee for the calender year 1972 relevant to the assessment year
1973-74 in question?"

The assessee-respondents are Managing Directors of a public limited H
654 SUPREME COURT REPORTS (2000] SUPP. 4 S.C.R.

A Company called Sarangpur Mills Limited. They had entered into agreements
with the Mills. Under the terms thereof they were, inter a/ia, entitled to
receive remuneration from the company. The relevant clause in that behalf
was clause (6). Clause 6 (d) permitted the company to pay to the Managing
Directors additional remuneration. Clause 6(e) reads thus: ,,_ -

B "(e) Notwithstanding anything to the contrary, the Directors may in
respect of any year resolve that the Managing Director shall not be paid
any remuneration _mentioned in sub-clause (a) or (b) or the perquisites
mentioned in the sub-clause (a) hereof for that year or that he shall be
paid such lesser remuneration or benefits than these mentioned in sub-
clause (a) and/or sub-clause (b) hereof in respect of that year as they may
C think fit in their absolute discretion in respect of such year and the
Managing Director shall refund any sum as may be necessary as a
consequence of such resolution of the Directors from any sum on account
of remuneration for that year drawn by him during the year."

On 12th April, 1973 a resolution was passed by the Board of Directors
D of the Mills relating to the Financial Year 1972, which in the case of the Mills
ended on 31st December, 1992. The resolution reads thus :

"EXTRACT FROM THE MINUTES OF THE MEETING OF THE
BOARD OF DIRECTORS OF THE SARANGPUR COTTON MFG. CO.
LTD. HELD ON 12.4.73.
E
Resolution No. 2

"RESOLVED that subject to the approval of the Company in General
Meeting to be obtained by way of abundant safety and caution, or
the financial year 1972, the amount of commission payable to each of
the Managing Directors Shri Navnitlal Sakarlal, Shri Nandkishore
F Sakarlal and Shri Saurabh Navnitlal under the respective Managing
Director Agreements executed with each of them should be expended
in the purchase of single premium deferred Annuity Policies from the
Life Insurance Corporation of India on the life of the concerned
Managing Director so as to provide for the Payment of annuity to
G each of them for his life and upon his death to his dependants, such
payments to commence from the date of his retirement as Managing
Directors of the Company or such other date as may be mutually
agreed upon between the Company and the concerned Managing
Director or from the date of his death whichever shall occur first
provided always that no benefit shall occur to any of the said Managing
H Directors or his dependants as the case may be nor shall any of the
C.l.T. v. NAVNIT LAL SAKAR LAL [BHARUCHA. J.] 655
said Managing £lirector or his dependants be entitled to any benefit A
or have any right, lien or interest in any of the aforesaid Policies until
the date of the first payment of annuity and the Balance Sheet and
Profit & Loss Account of the Company for the Year 1972 be prepared
accordingly. FURTHER RESOLVED that the following Resolution which
is hereby approved and proposed to be passed as an Ordinary B
Resolution at an Extra Ordinary General Meeting of the members of
the Company to be convened for the purpose and the Secretary is
authorised to send the relevant notice and explanatory statement to
the member of the Company.''

ORDINARY RESOLUTION
c
"RESOLVED that for the sake of safety and caution the Company
hereby approves and confirms that the amount of commission on the
net profits payable by the Company to each of the Managing Director
Shri Navnitlal Sakarlal, Shri Nandkishore Sakarlal and Shri Saurabhbhai
Navnitlal in accordance with provisions of law, for the financial year
1972, be expended by the Company for such year towards the purchase D
of single premium deferred payment Annuity Policies from the Life
Insurance Corporation of Managing Directors concerned so as to
provide for the payment of annuity to each of them for his life and
upon his death to his dependants, such payments to commence from
the date of his retirement from the Company as a Managing Director E
or such other date as may be mutually agreed upon between the
Company and the concerned Managing Director, it being clarified that
the re-appointment of a Managing Director on the expiry of his present
tenure of office will not amount to his having retired as Managing
Director or having ceased to be a Managing Director of the Company
or from the date of his death whichever shall occur first provided F
always that no benefit shall occur to any of the said Managing
Director or his dependants as the case may be nor shall any one of
the said Managing Directors or his dependants be entitled to any
benefit or have any right, lien or interest in the aforesaid Annuity
Policies until the date of the first payment of the annuity. G
Directors Shri Navnitlal Sakarlal, Shri Nand Kishore and Shri
Saurabhbhai Navnitlal did not take part in the discussions nor did
they vote on the resolution.

Certified true.
Chairman". H
656 SUPREME COURT REPORTS [2000] SUPP. 4 S.C.R.

A There were similar proceedings for the subsequent
,-, assessment years in
regard to the Managing Directors. The assessees did not participate in the
deliberations of the Board in respect of the resolutions but they did not
challenge the same and their conduct shows their acquiescence therein.

It is convenient now to refer, as illustrative, to the case of the assessee,
B Nandkishore.

Nandkishore claimed that the amount of Rs. 26,221 /-, that had been
expended by the Mills for the purchase of a referred annuity policy for him,
was not includible in his hands as a part of income from salary because it
did not form part of the remuneration that was payable to him. The Income
C Tax Officer rejected the contention since, in his view, the payment for the
purchase was made out of the remuneration that was due to Nandkishore. In
appeal, the Appellate Assistant Commissioner agreed with the Income Tax
Officer. Nandkishore carried the matter in appeal to the Income Tax Appellate
Tribunal. The Tribunal accepted the contention on behalf ofNandkishore that
D if clause 6(e) of the Agreement and the Resolution of the Board were read
in the proper light, it was clear that a portion of the remuneration which was
utilised for the purchase of the Deferred Annuity Policy "could not be said
to have accrued to the Managing Director but was diverted away before it
reached the assessee. Therefore, the amount utilised for purchase of deferred
annuity policy by the Sarangpur Mills was not assessable as remuneration
E in the hands of the assessee under the head Income from salaries."

Arising out of the order of the Tribunal, at the behest of the Revenue,
the two questions afore-stated were referred to the High Court of Gujarat. The
High Court affirmed the decision of the Tribunal. In its view, the Resolutions
made it quite clear that the intention was not to create any benefits either in
F favour of the assessees or their dependants· or to create any right, lien or
interest in the policy until the date of the first payment of annuity. The
payments of the annuity were to commence from the date or retirement of the
assessees or from the date of their death, whichever occurred earlier.
Th.erefore, even though the deferred annuity policies which were taken were
G Single Premium Deferred Annuity Policies and even though they were taken
out for the benefit of the assessees and in lieu of commissions payable to
them, it was clearly intended by the Board that the assessees should not have
any vested right in the policies. Upon this basis, it was held that the passing
of the Resolutions by the Board denied the assessees the remuneration which
could have become payable in those years. The intention was not to create
H any present right in favour of the assessees. Thus, the effect of the transaction
C.l.T. v. NAVNIT LAL SAKAR LAL [BHARUCHA, J.] 657
was to postpone accrual and receipt of income. A
We have heard learned counsel and we are inclined to take a view
different from that taken by the Tribunal and the High Court.

What is most relevant is a correct interpretation of the Resolutions of
Board. Shorn of unnecessary words, they resolved, for the financial years in B
question, that the amount of commission payable to each of the Managing
Directors under the respective Managing Director Agreements executed with
each of them should be expended for the purchase of single premium deferred
annuity policies on the lives of the Mal'laging Director. The Resolutions set
out the format of Resolutions to be passed by the Extraordinary General
Meetings of the Mills; they are in exactly the same terms. The Resolutions C
do not refer to clause 6(e) of the Agreements. They do not say that the
Managing Directors shall not be paid any remuneration or any part of such
remuneration. In fact, they refer specifically to "the amount of commission
payable to each of the Managing Directors" and resolve that that commission
payable to each of the Managing Directors shall be "expended in the purchase D
of annuity policies on the life of the concerned managing director." It is
impossible, in the circumstances, to conclude that the amounts of the
commission that were expended to purchase the policies had been diverted
and had not accrued to the Managing Directors. A proper construction
would be that such commission had accrued to them at the end of the
relevant financial years and that thereafter the sums thereof were resolved to E
be spent to purchase annuity policies for each of them, with which resolutions,
as the record shows, they concurred.

_... It was submitted by learned counsel for the assessees that the
' Resolutions must be so read as to mean that the Board employed clause 6(e)
of the Agreements to deny the obligation to pay to the assessees the particular F
part of their remuneration utilised in the purchase of the annuity policies and
that, therefore, there was no accrual thereof to them. On the construction that
we have placed on the Resolution, which appears to be the only possible
construction, the submission on behalf of the assessees has to be rejected.
G
In the circumstances, the judgment and order under challenge are set
aside. The first question is answered in the affirmative and in favour of the
Revenue. The second question is answered in the negative and in favour of
the Revenue. The civil appeals are allowed with costs.

B.S. Appeals allowed. H