The board passed a resolution after the year end stopping my remuneration because the company made no profit. The salary had already been credited to me month by month. Can I say it never accrued?
No, on the Madras High Court's 1965 decision under s.7 of the 1922 Act, whose accrual principle s.15 of the 1961 Act carries forward. Once salary has accrued under the contract of service, a resolution passed after the close of the year cannot undo the accrual; at most it operates as a waiver, and a waiver after accrual is a disposal of income already earned, not a failure of income to arise. The real-income doctrine, which lets a managing agent's commission given up on grounds of commercial expediency be excluded from business income, does not extend to the accrual or receipt of salary.
Decided by the High Court (K. Veeraswami J) on 1965-11-24, reported as (1966) 2 MLJ 473; reference under s.66(1) of the Indian Income-tax Act 1922. It bears on section 15, section 17(1) of the Income Tax Act 1961, in Salary & Perquisites and How Tax Law Is Read matters.
This is the case that marks the line on salary foregone, and it marks it on the side practitioners least like. Salary is chargeable when it becomes due whether or not it is paid, so the only question worth asking is when the right arose and what the contract said. If the entitlement was surrendered or varied by agreement within the year, or the contract itself provided for the reduction, that is a different case and the income may never accrue; if the giving-up came afterwards, the tax has already attached. The second holding is separately useful and is what makes the case relevant far beyond its facts: a managing director who holds office under a contract of service is an employee, his remuneration is salary and not business income, and the fact that he effectively runs the company does not change that where the board retains superintendence, direction and control. Read alongside CIT v Gopal Krishna Suri, the practical consequence is severe — once a receipt is salary, s.16 is the only source of deduction against it.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee was the promoter and managing director of Transformer and Switchgear Ltd., a public limited company incorporated on 28 November 1956. Article 106 of the memorandum and articles appointed him managing director for five years subject to the control and supervision of the board, on terms to be fixed by an agreement, and an agreement was executed on 22 May 1957. It appointed him managing director for five years from incorporation, defined his powers and duties, and made them exercisable subject to the superintendence, direction and control of the board and to the memorandum and articles. Clause 5 provided that the company should pay him, in respect of each year of account, a monthly remuneration of Rs 1,250 plus commission at 5 per cent of net profits, the commission becoming due yearly after the accounts were made up and certified, subject to his being entitled to draw the minimum remuneration in monthly instalments not exceeding Rs 1,250 per month. For years before AY 1960-61 he had returned the monthly remuneration as salary and had been assessed accordingly. The company's accounting year was the calendar year and his own the financial year. For the year ended 31 December 1959 the company credited Rs 1,250 to him every month but on 31 December 1959 debited him with Rs 15,000, the whole year's salary, the entry reading 'To M. D. Remuneration amount transferred... Rs. 15,000'. This was said to be pursuant to a board resolution of 9 May 1960 recording that, the company not having made any profit, it had decided to stop payment of the remuneration of Rs 15,000 per annum for 1959. For AY 1960-61 the assessee claimed he was not entitled to the remuneration and that the monthly credits gave him nothing; Rs 11,250 for the nine months April to December 1959 was brought to tax. The Appellate Assistant Commissioner allowed his appeal, holding he had been compelled by business expediency not to demand the amount and that there was no surrender because he was never entitled. The Tribunal reversed, holding him a salaried employee, the credited remuneration salary chargeable under s.7, and the resolution — passed long after his accounting year — incapable of abrogating his contractual right and in terms only stopping payment. The question referred was whether Rs 11,250 was assessable under s.7.
The question was answered against the assessee with costs. The monthly remuneration credited for the nine months was his salary and was assessable. A managing director who holds office under a contract of service is an employee notwithstanding the extent of his powers, where the board retains superintendence, direction and control. Salary having accrued month by month under the agreement, a board resolution passed after the close of the assessment year could not prevent the accrual; read as it stood it only withheld payment, and even if read as a withdrawal it would amount at most to a disposal of income by the assessee if he agreed to it, and such a denial, withdrawal or waiver occurring after the assessment year is ineffective in computing the income of that year.
On the first question the Court held the agreement could not be construed as anything but a contract of service. Extensive powers of management did not matter because the assessee was to exercise them subject to the superintendence, direction and control of the board and to the memorandum and articles; a director simpliciter is not a servant, but nothing prevents a director from also being a servant under a special contract of service, and the Court followed its own decision in Nagi Reddy that a managing director's remuneration is salary. The managing-agency cases relied on by the assessee, Indra Chand Hari Ram and K.R.M.T.T. Thiagaraja Chetty, were held not to assist, being cases about agency commission. On the second question, the agreement obliged the company to pay Rs 1,250 monthly and entitled the assessee to draw it, without exception and without any power in the board to stop or deny it. The Court accepted, following L.W. Russel, that 'allowed' in s.7 presupposes a vested right, but held the agreement did confer a right at the end of each month, and that the credit entries in the assessee's folio, read with the agreement, did result in accrual month by month; the 31 December entry showed the credit transferred, not withdrawn, which the company could not do under the agreement. Shoorji Vallabhdas was distinguished because there the withdrawal was by a subsequent agreement made during the assessment year itself. The real-income argument built on H.M. Kashiparekh was rejected on the ground that Kashiparekh concerned business income assessed under s.10, where commercial expediency in relation to expenditure is germane; the Court declined to carry the doctrine across to salary chargeable under s.7. Finally, applying Kothari Mehta & Co., a waiver made after the accrual of income under the terms of the agreement operates only as a disposal of income that has already accrued and does not justify a claim that there was no accrual, and being made after the assessment year it was in any event ineffective for that year; the entries, given the terms of the agreement, were irrevocable and the board could not cancel their effect by resolution.
We are unable to extend the doctrine of "real income" in the context of commercial expediency to receipt or accrual of salary which is liable to tax under Section 7.
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Handle my notice → Ask a CA on WhatsAppNo, on the Madras High Court's 1965 decision under s.7 of the 1922 Act, whose accrual principle s.15 of the 1961 Act carries forward. Once salary has accrued under the contract of service, a resolution passed after the close of the year cannot undo the accrual; at most it operates as a waiver, and a waiver after accrual is a disposal of income already earned, not a failure of income to arise. The real-income doctrine, which lets a managing agent's commission given up on grounds of commercial expediency be excluded from business income, does not extend to the accrual or receipt of salary. This was decided by the High Court (K. Veeraswami J) and bears on section 15, section 17(1) of the Income Tax Act 1961. It is reported as (1966) 2 MLJ 473; reference under s.66(1) of the Indian Income-tax Act 1922. This is the case that marks the line on salary foregone, and it marks it on the side practitioners least like. Salary is chargeable when it becomes due whether or not it is paid, so the only question worth asking is when the right arose and what the contract said. If the entitlement was surrendered or varied by agreement within the year, or the contract itself provided for the reduction, that is a different case and the income may never accrue; if the giving-up came afterwards, the tax has already attached. The second holding is separately useful and is what makes the case relevant far beyond its facts: a managing director who holds office under a contract of service is an employee, his remuneration is salary and not business income, and the fact that he effectively runs the company does not change that where the board retains superintendence, direction and control. Read alongside CIT v Gopal Krishna Suri, the practical consequence is severe — once a receipt is salary, s.16 is the only source of deduction against it. If it applies to you, the first step is this: Date the entitlement, not the payment. Identify the clause of the agreement or the article that creates the right and when under it the amount became due.
The assessee was the promoter and managing director of Transformer and Switchgear Ltd., a public limited company incorporated on 28 November 1956. Article 106 of the memorandum and articles appointed him managing director for five years subject to the control and supervision of the board, on terms to be fixed by an agreement, and an agreement was executed on 22 May 1957. It appointed him managing director for five years from incorporation, defined his powers and duties, and made them exercisable subject to the superintendence, direction and control of the board and to the memorandum and articles. Clause 5 provided that the company should pay him, in respect of each year of account, a monthly remuneration of Rs 1,250 plus commission at 5 per cent of net profits, the commission becoming due yearly after the accounts were made up and certified, subject to his being entitled to draw the minimum remuneration in monthly instalments not exceeding Rs 1,250 per month. For years before AY 1960-61 he had returned the monthly remuneration as salary and had been assessed accordingly. The company's accounting year was the calendar year and his own the financial year. For the year ended 31 December 1959 the company credited Rs 1,250 to him every month but on 31 December 1959 debited him with Rs 15,000, the whole year's salary, the entry reading 'To M. D. Remuneration amount transferred... Rs. 15,000'. This was said to be pursuant to a board resolution of 9 May 1960 recording that, the company not having made any profit, it had decided to stop payment of the remuneration of Rs 15,000 per annum for 1959. For AY 1960-61 the assessee claimed he was not entitled to the remuneration and that the monthly credits gave him nothing; Rs 11,250 for the nine months April to December 1959 was brought to tax. The Appellate Assistant Commissioner allowed his appeal, holding he had been compelled by business expediency not to demand the amount and that there was no surrender because he was never entitled. The Tribunal reversed, holding him a salaried employee, the credited remuneration salary chargeable under s.7, and the resolution — passed long after his accounting year — incapable of abrogating his contractual right and in terms only stopping payment. The question referred was whether Rs 11,250 was assessable under s.7. The matter was decided on 1965-11-24 by the High Court (K. Veeraswami J). On those facts the High Court held as follows. The question was answered against the assessee with costs. The monthly remuneration credited for the nine months was his salary and was assessable. A managing director who holds office under a contract of service is an employee notwithstanding the extent of his powers, where the board retains superintendence, direction and control. Salary having accrued month by month under the agreement, a board resolution passed after the close of the assessment year could not prevent the accrual; read as it stood it only withheld payment, and even if read as a withdrawal it would amount at most to a disposal of income by the assessee if he agreed to it, and such a denial, withdrawal or waiver occurring after the assessment year is ineffective in computing the income of that year.
On the first question the Court held the agreement could not be construed as anything but a contract of service. Extensive powers of management did not matter because the assessee was to exercise them subject to the superintendence, direction and control of the board and to the memorandum and articles; a director simpliciter is not a servant, but nothing prevents a director from also being a servant under a special contract of service, and the Court followed its own decision in Nagi Reddy that a managing director's remuneration is salary. The managing-agency cases relied on by the assessee, Indra Chand Hari Ram and K.R.M.T.T. Thiagaraja Chetty, were held not to assist, being cases about agency commission. On the second question, the agreement obliged the company to pay Rs 1,250 monthly and entitled the assessee to draw it, without exception and without any power in the board to stop or deny it. The Court accepted, following L.W. Russel, that 'allowed' in s.7 presupposes a vested right, but held the agreement did confer a right at the end of each month, and that the credit entries in the assessee's folio, read with the agreement, did result in accrual month by month; the 31 December entry showed the credit transferred, not withdrawn, which the company could not do under the agreement. Shoorji Vallabhdas was distinguished because there the withdrawal was by a subsequent agreement made during the assessment year itself. The real-income argument built on H.M. Kashiparekh was rejected on the ground that Kashiparekh concerned business income assessed under s.10, where commercial expediency in relation to expenditure is germane; the Court declined to carry the doctrine across to salary chargeable under s.7. Finally, applying Kothari Mehta & Co., a waiver made after the accrual of income under the terms of the agreement operates only as a disposal of income that has already accrued and does not justify a claim that there was no accrual, and being made after the assessment year it was in any event ineffective for that year; the entries, given the terms of the agreement, were irrevocable and the board could not cancel their effect by resolution. In the words reproduced by the source cited on this page: "We are unable to extend the doctrine of "real income" in the context of commercial expediency to receipt or accrual of salary which is liable to tax under Section 7." The decision followed or applied CIT v. Nagi Reddy (1964) 51 ITR 178 (Madras) — followed on managing director's remuneration being salary; Kothari Mehta & Co. (P.) Ltd. v. CIT (1963) 50 ITR 753 (Madras) — followed on waiver after accrual being a disposal of income; CIT v. L.W. Russel — referred to on 'allowed' presupposing a vested right; H.M. Kashiparekh & Co. Ltd. v. CIT — distinguished as a case of business income under s.10; CIT v. Shoorji Vallabhdas & Co. (SC) — distinguished, the withdrawal there having been by agreement made during the assessment year; Lakshminarayan Ramgopal & Son Ltd. v. Government of Hyderabad — applied as the test of master and servant.
It was decided by the High Court on 1965-11-24 and is reported as (1966) 2 MLJ 473; reference under s.66(1) of the Indian Income-tax Act 1922. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 15, section 17(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The question was answered against the assessee with costs. The monthly remuneration credited for the nine months was his salary and was assessable. A managing director who holds office under a contract of service is an employee notwithstanding the extent of his powers, where the board retains superintendence, direction and control. Salary having accrued month by month under the agreement, a board resolution passed after the close of the assessment year could not prevent the accrual; read as it stood it only withheld payment, and even if read as a withdrawal it would amount at most to a disposal of income by the assessee if he agreed to it, and such a denial, withdrawal or waiver occurring after the assessment year is ineffective in computing the income of that year. It arises in Salary & Perquisites and How Tax Law Is Read matters, on section 15, section 17(1) of the Income Tax Act 1961, and was decided by K. Veeraswami J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check whether the instrument giving up the salary was executed within the previous year and whether it varied the contract, or whether it merely stopped payment. The resolution here said the company 'decides to stop payment', which the Court read as withholding payment and not as denying the entitlement. Do not rely on H.M. Kashiparekh or the commercial-expediency line for a salary receipt; the Court refused to extend the real-income doctrine outside business income. If the client is a managing director arguing his remuneration is business income, look at whether the board has reserved superintendence, direction and control — if it has, expect the remuneration to be salary. Where the amount has already been credited in the employer's books, be ready to explain what the entries mean; the Court accepted that book entries are not conclusive but held that on these terms they did evidence accrual month by month.
Still good law. A citedby search returns 15 later citing documents. The Madras High Court applied it in T.M. Raghunathan v CIT (18 April 1996), which opened with 'A similar question came up for consideration before this Court in K.R. Kothandaraman vs CIT (1966) 62 ITR 348 (Mad)' and used its rule that remuneration once accrued cannot be cut down by a later resolution to hold the assessee taxable on the full Rs 25,000 rather than the reduced figure. The Gujarat High Court in CIT v Bachubhai Nagindas Shah (24 September 1975) set out Kothandaraman to the same effect (waiver after accrual 'operated only as a disposal of the income') though on facts it treated managing-agency cases as a separate class, so it is not counted as an application here. Nothing overruling, doubting or confining the accrual principle was found; no Supreme Court challenge is traceable to a 1965 reference under s.66(1). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a decision on s.7 of the Indian Income-tax Act 1922, not on s.15 of the 1961 Act; the reference question asked whether the sum was assessable under s.7. Section 15 of the 1961 Act is in substance to the same effect — salary is chargeable when due whether paid or not — but a reader should be told which statute the case was decided under, and it is stated here rather than glossed. The print records only 'K. Veeraswami, J.' and gives no second name, although this was a reference heard on the revenue side; treat the bench composition as unconfirmed. Indiankanoon carries the same judgment at two document ids, /doc/1143296/ and /doc/1413255/, and the two texts differ by a word in the passage about the resolution — one reads 'totally ineffective in the computation of the income' and the other 'totally ineffective on the computation of the income'. The key quote chosen below is free of that variance and was confirmed by exact-phrase retrieval, which returned only these two documents. The report contains obvious OCR damage in the citation strings ('Inderch and Hari Ram' for Indra Chand Hari Ram, a mangled citation for L.W. Russel), and those have been left as found rather than corrected. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered against the assessee with costs. The monthly remuneration credited for the nine months was his salary and was assessable. A managing director who holds office under a contract of service is an employee notwithstanding the extent of his powers, where the board retains superintendence, direction and control. Salary having accrued month by month under the agreement, a board resolution passed after the close of the assessment year could not prevent the accrual; read as it stood it only withheld payment, and even if read as a withdrawal it would amount at most to a disposal of income by the assessee if he agreed to it, and such a denial, withdrawal or waiver occurring after the assessment year is ineffective in computing the income of that year.
TaxSphere, “K.R. Kothandaraman v CIT”, https://taxnotice.vittsphere.com/caselaw/case/k-r-kothandaraman-v-cit-salary-given-up-after-it-accrued/ (validity last checked 2026-09-07)
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