Nonsuch Estate Ltd v. The Commissioner Of Income-Tax, Madras

NONSUCH ESTATE LTD. THE COMMISSIONER OF INCOME-TAX, MADRAS November 21. 1974 [H. R. KHANNA AND A. C. GUPTA, JJ.) lncome-taJ: Act, 1922-ASJfe.rsee followed mercantile system of acco11nti111-Debited in boob each year managing ~·ency remuneration for three year-Claimed dedui:tion in the third year on receipt of approval from Central Go~·enc­ment for reappointment of managing agents as tequired under s. 326 CompG!nieB Act-Whether assessee should have claimed deduct/on in each assessment ye~:r. The assessee who followed the mercantile system of accounting debited i:a ill account books certain sums of money as remuneration of the managing agenta for the assessment years 1957-58 to 1959·60. For the purpose of incomt:-tu the company added back the sum to its taxable income and claimed the wholo cum as a deductible expenditure in the as:sessment year 1959·60 on the grnund that the sum became payable only during that year when the Government accorded 'its approval to the new managing agency agreement. The Incomc-~ax Officer rejected the claim holding that the approval of the Central Government was necessary only for actual pavment and the assessee should have ascertainod the liability for each year and claimed it since he followed the mercantile sys· tem ·Of accounting. 'This view was upheid by the Appellate Assistant Commil-aioner and, the Income-tax Appellate Tribunal. The High Court held that although at the time the debit entries· were mado in the account books of the assessee, approval of the Central Government had not been recelved, when it came later, it gave legal effect to the debit enlriet with retrospective effect from April 1, 1956 and that the refusal of deductioa by the Income-tax Officer was right. Allowing the appeal to this Court, HELD : The High Court was in error in answering the question against the assessee. Even an assessee following the mercantile system of accounting is not entitlea to claim a deduction until liability for the sum for which deduction is claimed has accrued. The High Court overlooked the plain terms of s.326 of the Companies Act, 1956 under which it could not be assumed that the Central Government would approve every proposed appointment or re-appoint· ment of managing agent. [809A; .D; S!OA] In the instant case it is only when the Central- Government conveyed its approval to the appoi~tment of managing agents by its letter dated September 2, 1957 that the appomtment became effective and the Company's liability to pay t.he remurlerat.ion of the managing agents accrued. The liability becamo effective from Apn,11, 1956. because th~ C::c:ntral Government chose to give ita approval retroi.J>e<;hve operation. The bab11hty could not be said to had arisen fyom any date pnor to ~ptember 2, 1957 when the approval was given. Sec-tion _326 of the Compa.mes Act contain~ an absolute prohibition against the appom•ment or re·appomtment of a manaJ?ing agent before the ·approval of Central Government was obtained. [810B-C] CML APPELLATE JURISDICTION : Civil Appeal No. 1554 of 1970. Appeal by Special Leave from the Judgment & Order dated the l<lth Augut, 1968 of the Madras High Court in Tax Case No. 18 of 1965. G. B. Pai, A. G. Manessea, D. C. Mathur and K. K. John for i:ho appellant. ' H B. B. Ah11ja and S. P. Nayar, for the respondent. The Judgment of the Court was delivered by GUPTA, J. This is an appeal by special 1eave from a judgment of the Mauras High Court m a re1erence unaer secuun oo l 1 J uf the Income Tax Aat,, 1922. The appellant, Nonsuch Estate Limited, is a puoilc Lmi1ecl company mcorpuraLecl in the year 1 Y24 wJUer the lnwan Companies Act, 1913. The appellant, referred to hereinafter B as Lie Company, derives its. income from tea grown in its estate for which it is assessed to income-tax. M/ s. Harrisons and Crosfield LlIDlted have been the managmg agents of the Company from the h<:gmning. The fo1lowing question relating to the assessment year 19:>9-60 was referred to the High Court: qaaa uete fafats MIAH AGI, ARIA (Nonsuch Estate Ltd. The Commissioner of Income-tax, Madras) (21 waeaz, 1974) a = (Alo Uo RiTo GAT WT To eto FAT) arrat afafarn, 1956 (1956 Bt 1)— eet 326—NaHafanat a faafea—frgfea % fae eta aeare at AAASgrea frat stat—agater 89 8 gd Bette TeMTe HT TATAatfea aat—agiar faa wa ae At va fagfet ar sataAat ate sara afeaal at oferfas daw wea % fare argat arfver yaaa & tage grat—tat feafe Y ag eet eatfx aifnca age sera A arat 2site TaewaTaeta Feztaazaraggarae marfea garg, af ag garg faifaea aqitan fan aia ox fagfar at atte & a gern gatBate at fret carr afaeat Raritan at afata BTAaret van at, feat eat vt arr at MTA BTA TA, TATafamat at fagfaa st athe & at we sree et z |: aiat aadt aaa vate fafats % ara 8 area arrafafaare, 1913 ® ata 1924 $0 H fanfea ay ag aT1 Fe Th=aferes ferfrte eaesee arse H fers are aera & aT afsawat at fram fae ga ot araaz frsifea fear svar att mTeea aot Fad bfraat woe ara tics fafate areal oT sare afanat Xaa art & garg aft araedt a ara alt aa STRCo qt 1h! afama at ae & ales & fay gaat a ategas aff —»-«([ 197] 2 SA fito To 12,000 aay at alice ule a fou fafoata art & fae enere F4cat sa fray # frat sr arma Hed ge RE fafad Hae aahfrat war ar| aaah are Ga fe1 ata,1956 al arodt afafzan,1956 saa gar.at ag fafateaa fear var ar fa fet +e carat seat& faq acqat ae sah caer afanaiat & dba yaa ofafaam %Tara F HTST UH HU gar afer1 saer gfanatal are warvar ee fear war ar ate seat sega Peat war aT at fe meat# aru waulfer ax fear war ary aw muy H ag geagat at TEfe dad efeaa ara aes fafate aradt afafaa, 1956 ® saate Oya arr F ys aral oe sas ofertas J eg F 5 oeaeaT IT 10 ay at ararafe & faa ga: seed afeeal F wo Ffagat fear sat aferi ae HUT Hela THT Ht ATMaa F faeaa fear var at ate Beda avat< + 2 faaraz,1957al AIATagate 2 fear ar %erat africa wear cats ar agree wedt ot 1 1 aster, 1956. 30 Ga, 1956 at areata & far grad A aT TUTfavedaqert fvatie % er i saa afrsatat & Aedt- Fee ale war#1 411 Garg, 1955 & 30 qa, 1956 & ast % far arc B saferwai & A agt vee gar 21 30 ga, 1957 at aaaBA aA ATTYcai H vit oft fe 1958-59 favifea ag & gana & yarawalst ataaa miata % fang tdet dt ofear aaarg we fh 1959-60fasten ag & fay, fae far fe gaat ag1garg,1957 &30 4, 1958 aH a, ga ag & atera garg afawatalh fearsSoH Gem ga Ue afaa ay ag ati ae uf ara H gra veaaa aay et we a wa fH Hedta aeare & sae fad aqled >faar at, att gafay ara} A saw far sa aT TT aT. 1959-60% faaitr ag y ce ger aa aa ad & ea F arar fear 2 fH aewh aaa sag. dua aa dea at ae dt gafe aeareFX avaq & fax gamer & fear or, maar afsardt a ge are at aaeftemin & arene ge aAGe Ht feat fae Heda aware ar agquiea_aaa afan daa & fav gran ar ate faaifedt ay sete adfay afar at afafafiad axar afd or vic saat aifafan arent reat a! qt aat arat afeaoat ay fe faatedt weet & far acarg ay fe faatedt weet & far acarg fe faatedt weet & far acarg faatedt weet & far acarg weet & far acarg & far acarg far acarg acarg megefa fti adie age agar ate afraerFY aT agt eftemtorATT| Vea MaTaa Hl ae set fase fear vara fH sar azarH MMT TT He ATA BYofzfeafaal F1 wa, 1956 F30Fa,.1957 a arerafs % fan afaan & ofeafae at afta Ht arealTHF 30 Fa, 1958 Ht TAA sla ares Gaara as at AT BY AMATew ane vars art aifee at waar adh1 Sea aaTAT A ee aTMIA faaifedt % faeg fear1 ger eararaa % faa #& faefare gage Fat ae atta Teaaa wae A at TE Ji Ata ATTHU BT,: oat ay fe faatedt weet & far acarg ay fe faatedt weet & far acarg fe faatedt weet & far acarg faatedt weet & far acarg weet & far acarg & far acarg far acarg acarg me afafaatfca—araanz sifrafeal, afar WI sea FATATAT;ait X se aq ay fade aa feo fe argat a arfafian aet cafeaT aan fearcafe me fratfad arfirfsrs war-rate araye BS ge At Pee acti wr erat Hea H faa aa aHeTvai dat aa aa fe sa ufe & fad arfaea Maya Tt gat Mt frat:faa weld ar ara feat maT ot (Ta4)| "Whether on the facts and in the circumstances of the case, the sum of Rs. 97,188/- representing the Managing Agency remuneration for the period 1-4-1956 to 30-6-1957 was deductible in the computation of the income of previous year endmg on 30th June 1958, relevant for tbe assessment year 19 5 9-60." The relevant facts leading to the reference are these. The manag-ing agents of the Company were entitled . to commission at the rate of l i per cent on all sales of tea and other produces of the Company and D a further sum of Rs. 12,000/- per annum for secratarial work. There was, however, no written agreement embodying the terms. After the Companies Act, 1956 came into force on April l, 1956 it was decided that there should be a fresh managing agency agreement between the Company and its managing agents in conformity with the provisions of the said Act. A fresh agreement drawn up and submitted by the managinig agents. was approved by the Company. The new agree-ment proposed the reappointment of M/s. Harrisons & Crosfield Limited as the managing agents of the Company for a period of 10 yea.ts on a remuneration of 5 per cent commission on the net profits of the Company computed in the manner laid down in sections 349 to 351 of the Companies Act, 1956 subject to a minimum remunera-tion of Rs. 12,000/~ per annum. The revised terms were to· take effect from April 1, 1956. As required by sec. 326 of the Companies i' Act, the new agreement was sent to the Central Government for appro-val by a communication dated August 3, 1957 enclosing a formal application for the purpose in Form 25, On September 2, 1957 by· a letter addressed to the Company the Govcri;ment conveyed·· its approval to "the appointment of ~/s. H~rris~ns & Crosfi~lds Ltd. as the Managing agents ........ for a period of 10 years with effect from 1st April 1956, on a remuneration of 5 per cent commission on G the net profits of the Company comouted in the manner as laid down in Sections 349 to 351 of the Comoanies Act, 1956 subject to a minimum remuneration of Rs. 12,000/- (Rupees twelve thousand only) per annum paiyable to fhe Managing Agents, in the event of absence or inadequacy of profits in anv financial year." On rPceiot of the aporoval, the Comoany by a resolution adopted at an extraordi-narv ·general meeting of its shareho[1]ders held on October 4. 1957 reappointed M/s. Harrisons & Crosfield Limited on the terms stated above. In terms of the new a1?Teement the exi~ting a!!encv a!!l'CemP.nt between th parties stood cancelled with the expiry of March 31, 1956. 808 The Company follows the mercantile system of accounting. JFor the penod April 1, 1\1:>6 to June jU, 1\156, me Company crt:U1ted a sum ot Rs. 'JJ20/- to the account of the nLmagmg agents as ttteir remunerauon m accordance with the terms of tne prvposeo new agrCC"" ment. TlllS was disclosed in the published accounts of the Compimy for the year July 1, 1955 to June 30, 1956 relevant to the assessmi~nt year 1957-58. For the purpose of assessment of income-tax, howeYer, · & the Company added bacK me said sum or Rs. 9,320/- to its taxable incom.:. In the next accounting year ending on June 30, 1957 rele-vant to the assessment year l\l:>~-59 the same prncess was followed with regard to the remuneration payable to the managlllg agents. For the assessment year 19:i9-60 for wruch the previous year was July 1, 1957 to June: 30, 1958, a total sum of Rs. 97,188/- was shown as managing agents' remuneration payable during that year. This amo1mt was made up as under : · Amount at 326 frat saa afawal at frafer waar ga: fagfad feeaa & tH aa aa sfaga wudt eT Ta ae fH tat fagfaa waar(ga: fagfar fat ort % at & Salta genre ar aqater weet F aTHIT | Hehla aH aa aH MTA HaMad adi BM qa ay fe awe at sree 2% aos (aH), (a) ate (7) F fatafece weraat ger ael Prat aay i ara: ae area ah at aT aayHea,avait fret sacar afanat at cate searfoe fagfer saar gaisafaaBT aANST BT Sl Ait1 wa: Tega ATAAH Aad efeaa ws ATdics fafats at saa afanat & wot faghea oat carat eetaa fir Befta aeart F 2 faaead, 1957 B Ga are IAT ATMATSfaat at atc att saa afanal ar ofesfas dara ae & faq weaat fuer steya gar ari aa feafa F tar aét gor fe afar aaa.wert a mar at Wie sear ara aa Faller awa H aqaaar Imated a1 ag aa & fe ag afar 1 asta, 1956 A Maral gar aT,afar gar aaife edie aeare BH are agar wGMeat yaa a fear,agag arta 2at fegaze gaagaoweeeq attaAi, feed Tar 316 Sater eater Fast aft [1975] 2 TH fo Fo war att aa ofeheataat F afar F art Hag adt wer or awar feag faarax,1957 at arte & fad qaadt ate ot seqet at waroT, a fe ayared fear war at aalfs arer 326, gaa gd wate Festa|ARE BT BAe aPastce feat var at, saa afawat at fagfaaaaa oa: fagies far ot % free oot wr a ofase aes (Gat 5) —farfaer adtett afaarfcat : 1970 at fafart citer eect 1554. ,1965 & at arnet demr 18 F ge sea aad F ade19 wet, 1968 are fara aI areT % fare fate gaa aHT at maa Bt MIT aTaal StoAto Ts, To stoa|||arfaa,Ho Fo TatoatoAMATAIK" werat at ate awatt atosto WIT AIT THO|ato ATT araTaa ar fata eararfattat To Sto Way F fear|—raarfaafat geat-—-| mega ait maa afafra,1922 a are 66(1) F atafreer fq oa ox are oea caRTaT & fain & frog fate east BHT HY TE J1 BAA TATA Tete fro wife Tet gs ake T areaarg afafaan, 1913 % ada 1924 oF fanfaa at ae at, UHafoam fafate raat8i adterdt, faaat fe gat cab oeag wertwer Tare, ata arcar a feaa ara arat & ara aiaa wut z,faas far sa ot oraz fratfer fear arate tat BI Fag eraqus ara vies fafats, aradt at cart afaTat TT g | AT 1959-60fratzy ag & acafiaa farafafad seq asa arava at frefire fearTIT AT:, vay aeat orare TT aT ATA BY ofeheafaat F97,188 eae at Ufa, a} fe 1-4-56 & 30-6-57 at Brarafe% fav afaaun & ofwafaa al afaa Heat at, 30 Fa, 1958at aaa Be arr. gama ae at ara al ATTA HVT TATgare aayat ait fe 1959-60 F faster aya gare ati” :9. ag fade fat ort} fae A aer quate sa warege:meqat ® vasa afahal, HETAT AY VT MIT wea vols H faa Tzjhsfaaer at ax 8 ata & faq erate a ate afafea aries12,000 wae at uf & fre fatale ara} faq gaare1 aenfs‘ga fang & fraraal ar malas HA eu BE fafa HUT ast feargar ar. gas are wa fe 1 aie,1956aerdt afafaaa,1956gaat gar, 3 fatafeaa far var at fe feat ve ware oe faqgrad ate sak yaeq afaacialdra saa afafaae & sodasager TH SUT gat ae: sar afawaiay set CH TAT FUTfeat watar ale gaat sega fear mar ar at fe aradt & arcaaritter fran rar ar) aR HUTT A ag gears sl ae at fH Hae,ahaa wos Ie Hes feto at, Tradl afaftay, 1956 al are 349 a351 % afanfea Ofa4, anfoa aeodt F Yo aral We vasqiferfte & eo5°, aftat at10 ay at areata S fay ga:gacq sifawat ® wafagaa fear star arfay, fared 7g 12,000aq afar aqaaa ofthese 8 wa vet ST aa fara I WIT, 1956t cae deTi sar fe aratt afafray a are 326 F are wafers2 ag qaT HUT Hel ACHE FY ATA 3 TEA, 1957 F TATAara agate % faq Yer wat at1 SAH ArT aS 25 H fafea Set& fac wp atrafer aaer at aera Fear var at2 faaraz, 1957 9,320 97,188 "Proportionate remuneration for 3 months at 5 per cent: on the net profits for the period ending on 30-6·1956 paid during the year ending on 30-6-1958 9,320 Remuneration at 5 per cent on the net profit of the year ending on 30th Jun€: 1957 paid during the year entling on 30-6-1958 71,3,6S Managing Agents expenses for the year ending 30th June 1957 recouped during the year ending on 30th June 1958 . . · .13,200 Proportionate Managing Agent's expenses for the year ending on 30th June 1956 recouped during the year ending on 30-6-1958 3,300 97,188 Though this sum did not pertain to the previous year relevant to the assessment year 1959 60, the Company claimed it as deductible F expenditure for that year on the ground that the sum became payable only during that year when the Government accorded its approval 1to the new agreement. The Income-tax Officer rejected this claim on the view that the approval of the Central Government was necessa11 only for actual payment and "the assessee should have ascertained the liability for each year and claimed it on the mercantile basis which was the system adopted by the assessce company." The Appel-a late Assistant Commissioner and the Tribunal also took the same view. The High Court answered the question referred to it ag'<linst the asse:1-see on the following reasoning : " . . . . . ... There was undoubtedly an understanding between the managing agency and the assessee as to the new terms of remuneration which actually were given effect to by making debit entries in the remuneration account then and there. It is true that at the time the: debit entries were made, approval of the Central Government had not come. But when it ciune actually later, it gave legal effect to the debit understanding entries, not from the date of the approval but from April l, 1956. That being the case, the refusal of the deductioDJ, in our opinion was right." · In our judgment the High Court was .in error in answering the q\)estion referred to it against the assessee. It appears that the In· B come-tax authorities, the Tribunal and the High Court all laid special emphasis O!l the fact that the Company followed the mercantile system of accounting. The distinction between the two methods of account· ing, one on the cash basis and the other on the mercantile basis is well-known. In Commissioner of Income-tax, Madras v. A. Gajapathy Naidu ( [1]) , this Court explained the difference between the two methods quoting with approval an extract from a Judgment of the Allahabad High Court in Commissioner of · Income-tax v. Singari Bai(2). In c Gajapathy Naid.u's([1]) case this Co~rt said: · "It is commonplace that there are two principal methods of accounting for the inc,ome, profits and gains of a business one is the cash basis and the other, the mercantile basis. The latter system of accountancy "brings into credit what is due immediately it becomes legally due and before it is actu-D ally received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actu-ally disbursed"." ' However, even an as~essee following the mercantile system of ac-counting is not entitled to claim a deduction until liability for the sum for which deduction is claimed has accrued. The reasons given by E · the High Court overlook the plain terms of sec. 326 of the Companies Act, 1956. Sec. 326 so far· it is material for the question involved in this case, is in these terms : "Sec. 32~. (1) In respect .of any company ........... . ar weaBY fasAT CH TAH AT AVAIL F ATAT agqared aad_«- BRAT wos ara Ges A cara afawat H eT A frgeT ata gq WTfeatar, aif12,000 wae, (aIXe BAIT BIT Hae)F BATgfhafis & aera aeodt ofafraa,1956 at aad 34983510afrefad Ofs # anfna wert& ye aval gt 5%, aan Fe eRonfvafan Tt 1 ait, 19568 10 ag at areata % fac fear arae vifeatan feet, fata ag ¥ ara at acatcsar ar aah ware Fisag afeaat at oft as aaa arsa waated wt oifta at oA‘Te BAT TCH MCAS. STU UH eras are afeaaa4 Waqay, 1957 BT AIA seraTeal BT Tarat fear ale sayaa faaBATU I Hae efor Us Ara Hes fro at ga: fagar fearaaBUT H fear F ATI saa F ata faa afew Fart ¥ frat war Fue 31 as, 1956 ® ware alt H. ara aat 3. arrat aifaisaa wear vais ar aga atdt ti1 wa,1956 & 30 Ya, 1956 at srarafe % fae Hert 4, seater AT HATh fray F agart Gas oftafas F wT A garg gfanaial F AeF 9,320 wa at uta war Ht S1 ae aa 1957-58 F fate ag a‘gana 1 Garg, 195530 ga, 1956 Fad F fae Heat F safeae J owe std gz, Tara grate fastere seers fau araATT BT AT TT F 9,320 wer at us st ats feat F1 30 |a,1957 Bl aaa Bla ara ara Ae Aw, a fe 1958-59faatcor|ay a gaa 2, sara afaraiat at aaa fais & faye Haat Agfear a7aTs TE AT1 TT 1959-60 & fasten ag % fan, frase farfe game ag 1 Garg, 1957 & 30 Ba, 1958 aH aT, sa ag F etersgarg afraaiat & nfs tere aaa ga uf97,188 wastafar at ve at| ga wae at farafafad sate & qu fear aa at: 30 HA, 1958 BY ware st ary ag Fater, 30 Far, 1956 wt aarea sa are srarafz% fagge asl 7x 5% at at a 3 wa ® faeaaa ognicn nfwrfia | 9,320 eat * Gh i7‘ood.4 “aaa Wee To MB MIgaT [Ato Tat] ==.319 |30 FA, 1958 a marca AA ay ad Fdaa, 30 aa, 1957 a aaa AA aa agag ara ge 5% at ava daa ofeatinn | 71,368 B71 30 Ha, 1958 BY aArcT slA ae ag Falaa sfagta fae me 30 Ga,1957 at aaaam ara ag & fav saca afanaiat & aa 13,200 =ya 30 Ya, 1958 Btanrcd aa are as Faroa sfaqia fae Te 30 Yar, 1956 BY AATam ayag&fae sara afancial Fmata as 3,300 BI4 97,188 27a 4. waft ag uf 1959-60 ¥ frater at a gaa gant ay& arafeaa aél 2, fac at werd A gad fre sa ware Te Tere FTAave ad 8 wr 8 arar fear 3 fe.ag ule Fae ve ag % ctoa ataaa aims ht aa fe awarea at ag F fae wgaler2 fear arymaar ofaaret A ze ara at se afeentor HF grec at MATT HTCfaor fe Festa TAHT HT AMT Fae aeafan dara F far oraat atz faaifiat at saa ag & fav afaca atafafafeaa azarwafer a ate saa afiisam arart atarar Har afar ar at fpgfrarfratfeth F wert aad a arte afsest arar aoaratg we cata| seq at 1 eaTaTa adie agree A vet argaa freq atefavafeu ne feat sat er: sat,farafafaa arent F marae at faaifedy. cqfwataa& ag fraeaayl & art A gary afew wizfaaifedt & atta facaete wa agata at we at faa fa areaaq¥ set ana ofertas F Ae H faafoa ofafseat wx H varamare mar aT| ag aa Se fe sa faafrt sfatsedt & fing ayAAT Healy ATH BT TAMA TT al gata faeqagMTNA aeaa A-Tas Tear fear war ar wie Taw gra za faafaa sfatceat at ta wr a aqatied a arta & wardt adt “frat war at afew 1 ade, 1956 % fearsatari; ga ga fareag feafa att et gard ua A weld & fae sare fear araofaa a ary”|oe i; ga ga farerea ae wa FH seq eqns A, seat frafaa fae ay sea sr fraifedt& face gat at F qadt at attar sda garfe wat ~sifrarfeat, aftr att seq Tae AY A ga aeT IT fay aafeat fa aerdt + atfnfsan car tafe ar agacr far ar) aa ataq a cafaat, aaiq wm at das F arare ge ate gad arfasa %MAT It, Bala TM wat sae afafea g1 waste igad, AAAaara Yo waafa atag! Baas Hea marag a ea al aghatseala aeat Bl, WlaHe Bara aaTA fame ate’ Fs Aras F Regarzseq grasa F grat faa ae fara FA vH sawn Bl aPAtar F araSSI HUH ETS fear ari aagfa ass F aaa Hea aaraT afara seRTe aa era feat—oo,oe |4-OY “gg ara waar & fa feet arz-are al ara, arat ate gfaarat % faa ta ay cafaat & at gea fagiea gs TAH ag.fe Vas F arent Tz Ate facta arfotsy F grare TT| TRATAATdar saft® ara,aa dard. vast ara Fo war ax fearara ge ait eae ga fe sant aaa A yrea fear wre aE:qed 47 VTA AT MAMA ys; Be sas are sa cH Ft,faa far da afaea sora at ara 2, faafaasfafce gaaqa at ara ante wa fe ag aeafan er a afaaftaae att 9,320 (b) unless the approval of the Central Government has F been obtained for such appointment or re-appoint-ment. ( 2) The Central Government shall not accord its approval under sub-section ( 1) in any case, unless it is satisfied-( a) that it is not against the public interest to allow the company to have a managing agent; G (b) that the managing agent proposed is, in the opinion, a fit and proper person to be appointed or re-appoin-ted as such, and that the conditions of the managing agency agreement proposed are fair and reasonable; and ( c) that the managing agent proposed has fulfilled any H conditions which the Central Governmerti requires him to fulfil." (1) 53 I.T.R. 114. (2) 13 I.T.R. 224. 5-L34SSupCI/75 ' 810 Section 326 prohibits the appointment or re-appointment of a managing agent unless the Central Government approved such appoint-ment or re-appointment. The Central Government would not accord its approV'al unless the requirements specified in clawses (a), (b) a.nd (c) of sub-section (2) of the section have been fulfilled. Therefore, it can.not be· assumed that the Central Government will approve· every proposed appointment or re-appointment of a managing agent. Thus in the instant case it is only when ~he Central Government conveyed its approval to the appointment of M/s. Harrisons and Crosfield Limi1ted as managing agents by its letter dated September 2, 1957 that the appointment became effective and the Company's liability to pay the remuneration of the managing agents accrued. The position here is not that the liability had arisen earlier and its quantification only de-pended on the approval of the Central Government. It is true that the liability became effective from April 1, °1956, a date anterior to the relevant previous year, . but that is b1:c11use the Central Governm1!nt chose to giv(: its approval retrospective operation. The Hability in these circumstances cannot be said to have· arisen from any date priior to September, 2, 1957 when the approval was given as sec. 326 con-tains un absolute prohibition against the appointmevt or re-appoint-ment of a managing agent before the approval of the Central Govern-ment was .obtained. In our opinion, the position is quite clear fwm the terms of sec. 326 and we do not 1:onsider it necessary to refer to the authorities cited by the learned counsel for either side. The appeal is accordingly allowed, the answer given by tfle High Court to the question referred to it is discharged and tlie question is answered in the affirmative and in favour of the asseS1H:e. The appellant will be entitled to its costs in this Court and in the High Court. P.E.R. 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