1.7       Query

Computation of Managing Agency Commission Alongside with Reallocated

Capital and Revenue and Disallowed expenses.

 Section 349 of the Companies Act defines Net Profit for purposes of computation of Managerial remuneration. A managed company calculates the Managerial Remuneration on the allocations to revenue & capital as accepted by its auditors.  Subsequently at the time of assessment the revenue officers modify the income by –

            (i)            reallocating capital & revenue ; and

            (ii)            disallowing certain expenses.

In these circumstances, the following questions come up for consideration:

(a)        Is it necessary for the managed company to recalculate the managerial remuneration as embodied in the assessment order? In other words, can the profits, etc. be different from each other in the assessment order and financial books?

(b)        If the adjustment is to be made, in which year the adjustment will be done – whether in the year to which it relates or in the financial year succeeding the assessment.  To cite an instance –Financial Year 1959-60 Amounts disallowed—Rs. 20,000/-

Assessment date 28.2.62 Rs. 2,000/- capitalized by Company treated as revenue

                                           By I.T.O. (Depn. Being 10%).

Whether the adjustment for Rs. 18,200 (20,000—1,800) will be done in the Expenditure of 1961-62 and remuneration will be calculated accordingly; or the remuneration for 1959-60 is re-calculated at the accepted figures.  In this event, what is the liability of the Auditor with reference to his certificate? What is also the effect if the accounts are already approved by general body?

(c)        What will be the position if the assessment has been disputed by the Company and an appeal is pending and (ii) the time for filing appeal not being over, the company contemplates an appeal?

(d)        Whether the said difference in remuneration is to be reimbursed by the Managing Agents or can be adjusted out of the remuneration for the year when the adjustment is made?

(e)        What will be the legal position of such amount? Will it be treated as a loan to or advance against remuneration of the Managing Agents ?

                                              Opinion                                                                       July 7, 1962

  The computation of managing agency commission is to be made in accordance with the provisions of Sec. 349 of the Companies Act, 1956. The provisions of the Section have nothing to do with the Income-tax assessment of the Company. If the expenditure incurred by the Company during the year has been properly allocated to revenue and capital so as to disclose a true and fair view, then the fact that some expenditure is not allowed for tax purpose as revenue expenditure or is not allowed to be capitalized for income-tax purposes as revenue expenditure or is not allowed to be capitalized for income-tax purposes has no bearing on the computation of managing agency commission. In view of this the various questions raised do not arise for consideration.

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