Case: C.I.T.,Gujarat-I Vs. Navnit Lal Sakar Lal

ts are Managing Direct of a public limited company called Sarangpur Mills Limited. They had entered into agreements with the Mills. Under the terms thereof they were, inter alia, 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.On 12th April, 1973 a resolution was passed by the Board of Directors of the Mills relating to the financial Year 1972, which in the case of the Mills ended on 31st December, 1992.There were similar proceedings for the subsequent assessment years in regard to the Managing Directors. The assesses did not participated 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.Nandkishore claimed that the amount of Rs.that had been expended by the Mills for the purchase of a deferred annuity policy for him, was not includable 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 Tax officer rejected the contentions 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 of Nandkishore that 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 in the hands of the assessee under the head Income from salaries."7. Arising out of the order of the Tribunal, at the behest of the Revenue, the two questionswere 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 benefit either in favour of the assessees or their dependents 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 of retirement of the assessees or from the date of their death, whichever occurred earlier. Therefore, even though the deferred annuity Policies and even though they were taken out for the benefit of the assessees and in lieu of commission 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 any present right in favour of the assessees. Thus, the effect of the transaction was to postpone accrual and receipt of income.

Court's reasoning:
9. What is most relevant is a correct interpretation of the Resolution of the Board. Shorn of unnecessary words, they resolved, for the financial years in 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 Managing 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 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 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 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 be spent to purchase annuity policies for each of them, with which resolutions, as the record shows, they concurred.10. 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 assessee the particular part of their remuneration utilised in the purchase of the annuity policies and that, therefore, there was no accrual thereof 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 assessee has to be rejected.