Judgment

GUPTA, J.:- This is an appeal by special leave from a Judgment of the Madras High Court in a reference under Section 68 (I) of the Income-tax Act, 1922. The appellant, Nonsuch Estate Limited, is a public limited company incorporated in the year 1924 under the Indian Companies Act, 1913. The appellant, referred to hereinafter as the Company derives its income from tea grown in its estate {or which it is assessed to income-tax. M/s. Harrisons and Crosfield Limited have been the managing agents of the Company from the beginning. The following question relating to the assessment year 1959-60 was referred to the High Court:

"Whether on the facts and in the circumstances of the case, the sum of Rupees 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 ending on 30th June, 1958, relevent for the assessment year 1959-60."

2. The relevant facts leading to the reference are these. The managing agents of the Company were entitled to commission at the rate of 11/2 per cent on all sales of tea and other produces of the Company and a further sum of Rupees 12,000/- per annum for secretarial 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 managing agents was approved by the Company. The new agreement proposed the re-appointment of M/s. Harrisons and Crosfield Limited as the Managing agents of the Company for a period of 10 years 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 remuneration of Rs. 12,000/- per annum. The revised terms were to take effect from April 1, 1956. As required by Section 326 of the Companies Act the new agreement was sent to the Central Government for approval 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 Government conveyed its approval to "the appointment of M/s. Harrisons and Crosfields 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 the net profits of the Company computed. In the manner as laid down in Sections 349 to 351 of the Companies Act, 1956 subject to a minimum remuneration of Rupees 12,000/- (Rupees twelve thousand only) per annum payable to the Managing Agents, in the event of absence or inadequacy of profits in any financial year". On receipt of the approval, the Company by a resolution adopted at an extraordinary general meeting of its shareholders held on October 4. 1957 re-appointed M/s. Harrisons and Crosfield Limited on the terms stated above. In terms of the new agreement the existing agency agreement between the parties stood cancelled with the expiry of March 31, 1956.

3. The Company follows the mercantile system of accounting. For the period April 1,1956 to June 30, 1956, the Company credited a sum of Rs. 9,320/- to the account of the managing agents as their remuneration in accordance with the terms of the proposed new agreement. This was disclosed in the published accounts of the Company for the year July 1, 1955 to June 30. 1956 relevant to the assessment year 1957-58. For the purpose of assessment of income-tax, however, the Company added back the said sum of Rs. 9,320/- to its taxable income. In the next accounting year ending on June 30, 1957 relevant to the assessment year 1958-59 the same process was followed with regard to the remuneration payable to the managing agents. For the assessment year 1959-60 for which the previous year was July 1, 1957 to June 30