Vildirect: IncomeTax-caselaws-1966-VIL-160-BOM-DT

1966-VIL-160-BOM-DT

Equivalent Citation: [1966] 62 ITR 34

BOMBAY HIGH COURT

Date: 18.02.1966

JK. CHEMICALS LTD.

COMMISSIONER OF INCOME-TAX

Now, at the commencement of the accounting period for the assessment year 1958-59, i.e., in the account year commencing from July 1, 1956, the said amount of Rs. 5,929 was carried forward in the books of account of the company and at the close of the accounting period, i.e., June 30, 1957, the assessee-company transferred the said sum of Rs. 5,929 to the credit of its profit and loss account for the said year, i.e., account year, July 1, 1956, to June 30, 1957. The Income-tax Officer included the said amount of Rs. 5,929 in the total income of the assessee under section 10(2A) of the Indian Income-tax Act, 1922. The view taken by the Income-tax Officer has been upheld by the Appellate Assistant Commissioner as well as by the Tribunal. The line of reasoning adopted by the learned Accountant Member, who has written the order of the Tribunal and adopted by Mr. Joshi, the learned counsel for the revenue, is, in the words of the Accountant Member, in the following terms: "At one stage, the sum of Rs. 5,929 stood in the account books as if due by the assessee to its employees. After some time the employees lost all their rights to claim payment of the said dues even though they legally continued to exist whether under the general law or under the specific laws such as the Industrial Disputes Act, the company itself took credit for the said sum in the profit and loss account and treated it as if available for being distributed by way of dividend amongst the shareholders. Certainly, therefore, the assessee-employer did obtain benefit in respect of the erstwhile liability of Rs. 5,929 when it ceased to exist. I, therefore, reject all the contentions pressed upon the Bench, As I have pointed out, the assessee himself considered that it incurred a certain trading liability on account of wages, salaries, bonus, etc., payable to its employees for services rendered by them, when they became due and made suitable entries in its account books. If, therefore, this is the manner in which the trading liability can be said to have been 'incurred' in an earlier and appropriate year, it must be held that it 'ceased' to exist when the assessee itself reversed the entries in its own account books in such a manner that it extinguished its liability and took credit for something by taking the sum of Rs. 5,929 to its profit and loss account and treating it as income available for being distributed amongst the shareholders by way of dividend. The reasons for reversing the entries may be many."
On an application made by the assessee, the Tribunal has referred the following question: "Whether, the sum of Rs. 5,929 could be assessed under section 10(2A) of the Indian Income-tax Act, 1922, as the income of the relevant accounting year."Mr. Kolah, the learned counsel for the assessee, contends that the Tribunal was in error in holding that the said amount was taxable in the hands of the assessee under section 10(2A) of the Act. According to Mr. Kolah, the liability which the assessee-company had incurred in respect of wages, salaries and bonus payable by the assessee-company to its employees had neither been remitted by them nor has that liability ceased to exist. The mere reversal of the entries on the part of the assessee in its books of account cannot have the effect of either "remission or cessation" of the liability. Mr. Kolah further stated that the facts of the present case before us are similar to the facts of the case decided by us in Kohinoor Mills Co. Ltd. v. Commissioner of Income-tax and the decision in that case would govern the present case. Mr. Joshi does not dispute the correctness of the decision in the afore said case, but according to him that decision has no application to the facts of the present case. He contended that the said decision is distinguishable on facts inasmuch as the entries made in respect of the accrued liabilities in the books of Kohinoor Mills, which was maintaining its accounts on mercan tile basis, had continued to show the said amounts in its books of account as a liability. The Kohinoor Mills had not reversed the entries and transferred the amount to the credit of its profit and loss account in the year of assessment. The only ground that was given by the Tribunal to bring it to tax was, the period of three years having expired, the liability had become unenforceable and, therefore, had ceased. Facts in this case, however, are different. What was formerly shown as a liability is now no more shown in the year of account as a liability of the company. The company has transferred this amount to the credit of its profit and loss account and that makes all the difference. According to Mr. Joshi, profits of the com pany are to be assessed according to the provisions of the Income-tax Act. Referring to section 13 of the Act, Mr. Joshi argued that the computation of the assessee's income has to be done in accordance with the method of accounting adopted by him and the assessee has, in his books of account, shown the said amount as a credit item in the profit and loss account. The income-tax authorities as well as the Tribunal were, therefore, right in holding that the amount was taxable in the hands of the assessee. We find it difficult to accept the contentions raised by Mr. Joshi. It is indeed true that the profits of the company are to be ascertained in accordance with the provisions of the Income-tax Act. The question, however, remains whether the said amount of Rs. 5,929 is either an income or "deemed income" taxable under the provisions of the Act. It is not necessary to go over the various sections. Suffice it to say that the scheme of the Income-tax Act shows that the Income-tax Act levies tax on the total income of the assessee as determined in accordance with the provisions of the Act, and the relevant provisions show that the income that gets included in the total income is the income derived from the various sources mentioned in the Income-tax Act or the amounts which are deemed income within the meaning of certain provisions of the Act. Now, in the circumstances of the case, the said amount of Rs. 5,929 cannot be said to be an income derived by the assessee in the year of account from any one or more of the various sources mentioned in the Income-tax Act. In fact, before the income-tax authorities as well as the Tribunal the said amount was not sought to be brought to tax as income from any of the said sources, but had been taxed as a deemed income under section 10(2A) and the question to be considered is whether it is "deemed income" within the meaning of section 10(2A).

BENCH

The judgment of the court was delivered by TAMBE C. J.-The assessee is a public limited company doing business in chemicals. We are here concerned with the assessment year 1958-59, the account period being July 1, 1956, to June 30, 1957. The assessee company maintains its accounts on mercantile basis. On the basis of this system, whenever the company incurred any liability on account of the wages, salary and bonus that became due and payable to its employees, it had claimed allowance or deduction in respect off such trading liability in the various prior years even though the amounts had not been in fact paid to the employees concerned. For this purpose the company had made suitable entries in its account books. In respect of the assessment of these various prior years, the company had claimed deductions in respect of these various amounts, which had become due and payable by way of salary, wages and bonus to its employees on the ground that the assessee-company had incurred a liability in respect of them. In view of the mercantile system of accounting adopted by the assessee, these deductions were allowed. Now, it so happened that certain portion of such wages, salary and bonus relating to which deductions were allowed, were not drawn by the employees, and certain amounts had remained undrawn and unpaid to the employees. The position at the commencement of the relevant account period was that a sum of Rs. 5,929 in respect of which deductions had already been allowed in prior years of assessment had remained undrawn and unpaid to the employees. The said sum of Rs. 5,929 was the aggregate of certain amounts, which had been allowed as deductions during the accounting periods June 30, 1945, to June 30, 1953.

JUDGMENT

On an application made by the assessee, the Tribunal has referred the following question: "Whether, the sum of Rs. 5,929 could be assessed under section 10(2A) of the Indian Income-tax Act, 1922, as the income of the relevant accounting year."Mr. Kolah, the learned counsel for the assessee, contends that the Tribunal was in error in holding that the said amount was taxable in the hands of the assessee under section 10(2A) of the Act. According to Mr. Kolah, the liability which the assessee-company had incurred in respect of wages, salaries and bonus payable by the assessee-company to its employees had neither been remitted by them nor has that liability ceased to exist. The mere reversal of the entries on the part of the assessee in its books of account cannot have the effect of either "remission or cessation" of the liability. Mr. Kolah further stated that the facts of the present case before us are similar to the facts of the case decided by us in Kohinoor Mills Co. Ltd. v. Commissioner of Income-tax and the decision in that case would govern the present case. Mr. Joshi does not dispute the correctness of the decision in the afore said case, but according to him that decision has no application to the facts of the present case. He contended that the said decision is distinguishable on facts inasmuch as the entries made in respect of the accrued liabilities in the books of Kohinoor Mills, which was maintaining its accounts on mercan tile basis, had continued to show the said amounts in its books of account as a liability. The Kohinoor Mills had not reversed the entries and transferred the amount to the credit of its profit and loss account in the year of assessment. The only ground that was given by the Tribunal to bring it to tax was, the period of three years having expired, the liability had become unenforceable and, therefore, had ceased. Facts in this case, however, are different. What was formerly shown as a liability is now no more shown in the year of account as a liability of the company. The company has transferred this amount to the credit of its profit and loss account and that makes all the difference. According to Mr. Joshi, profits of the com pany are to be assessed according to the provisions of the Income-tax Act. Referring to section 13 of the Act, Mr. Joshi argued that the computation of the assessee's income has to be done in accordance with the method of accounting adopted by him and the assessee has, in his books of account, shown the said amount as a credit item in the profit and loss account. The income-tax authorities as well as the Tribunal were, therefore, right in holding that the amount was taxable in the hands of the assessee. We find it difficult to accept the contentions raised by Mr. Joshi. It is indeed true that the profits of the company are to be ascertained in accordance with the provisions of the Income-tax Act. The question, however, remains whether the said amount of Rs. 5,929 is either an income or "deemed income" taxable under the provisions of the Act. It is not necessary to go over the various sections. Suffice it to say that the scheme of the Income-tax Act shows that the Income-tax Act levies tax on the total income of the assessee as determined in accordance with the provisions of the Act, and the relevant provisions show that the income that gets included in the total income is the income derived from the various sources mentioned in the Income-tax Act or the amounts which are deemed income within the meaning of certain provisions of the Act. Now, in the circumstances of the case, the said amount of Rs. 5,929 cannot be said to be an income derived by the assessee in the year of account from any one or more of the various sources mentioned in the Income-tax Act. In fact, before the income-tax authorities as well as the Tribunal the said amount was not sought to be brought to tax as income from any of the said sources, but had been taxed as a deemed income under section 10(2A) and the question to be considered is whether it is "deemed income" within the meaning of section 10(2A).

The material part of section 10(2A) is in the following terms: "Where for the purpose of computing profits or gains under this sec tion, an allowance or deduction has been made in the assessment for any year in respect of any.... trading liability incurred by the assessee and, subsequently during any previous year, the assessee has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the value of the benefit accruing to him shall be deemed to be profits and gains of business and to have accrued or arisen during that previous year." It is not disputed, and it cannot be disputed, that the first condition has been satisfied. The assessee had, in fact, in the computation of its profits and gains of earlier years, obtained deduction in respect of the said amount aggregating to Rs. 5,929 as a trading liability accrued to it in respect of wages, salaries, bonus, etc., payable to its employees. The question to be considered is whether in the account year relevant to the assessment year, with which we are concerned here, the assessee has received any benefit by way of remission or cessation in respect of the said amount of Rs. 5,929.

The mere fact that more than three years have elapsed since the accrual of the liability and that the debts have become unenforceable against the assessee under the general law does not constitute cessation of the trading liability within the meaning of section 10(2A). We have taken this view in Kohinoor Mills Ltd. v. Commissioner of Income-tax. The ratio of this case has been well summarised in its placitum in the following terms:

"Where wages are payable but they are unclaimed and their recovery is barred by limitation, the position in law is that the debt subsists, not withstanding that its recovery is barred by limitation. There is in such a case no 'cessation of trading liability' within the meaning of section 10(2A) and the amount of such wages cannot be added to the income." As already stated, Mr. Joshi does not dispute the correctness of this decision. He, however, contends that the decision has no application where the assessee has himself failed to show the trading liability and has transferred the said liability to the credit of its profit and loss account, and that transfer of the entries in the aforesaid manner brings about remission or cessation of the trading liability. This also appears to be the view taken by the Tribunal. The question to be considered is whether the transfer of these entries brings about a remission or cessation of its liability. The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt-the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability. We have already held in Kohinoor Mills case that the mere fact of the expiry of the period of limitation to enforce it, does not by itself constitute cessation of the liability. In the instant case, the liability being one relating to wages, salaries and bonus due by an employer to his employees in an industry, the provisions of the Industrial Disputes Act also are attracted and for the recovery of the dues from the employer, under section 33C(2) of the Industrial Disputes Act, no bar of limitation comes in the way of the employees: Bombay Gas Co. Ltd. v. Gopal Bhiva.

We may also incidentally refer to the provisions of the Bombay Labour Welfare Funds Act, 1953. In the year 1953 the State legislature enacted an Act to provide for the constitution of a fund for the financing of activities to promote welfare of labour in the State of Maharashtra for conducting such activities and for certain other purposes. The Act came into force on 17th June, 1953. It is not necessary to go in detail into the provisions. It would be sufficient to note a few provisions thereof. Sub section (10) of section 2 provides: " 'Unpaid accumulations' means all payments due to the employees but not made to them within the period of three years from the date on which they became due whether before or after commencement of this Act, including the wages and gratuity legally payable..." The said amount of Rs. 5,929 represented the amount due by the assessee to its employees in respect of salary, wages and bonus for the years 1936 to 1953. More than three years had already elapsed since the accrual of the said liability. The said amount was unpaid accumulations in the hands of the assessee within the meaning of section 2(10) of this Act. Section 3 provides: "3. The State Government shall constitute a fund called the Bombay Labour Welfare Fund and notwithstanding anything contained in any other law for the time being in force or in any contract or instrument, all unpaid accumulations shall be paid to the board..."It is clear that the combined effect of section 3 read with section 2(10) is that the assessee is required to transfer the said unpaid balance amount ing to Rs. 5,929 to the board. It is true that this has not been transferred till the end of the year 1957. It has been stated at the bar that there was a lacuna in the Act inasmuch as there was no provision in the Act granting a discharge to the employer in respect of its liability to its employees on payment of the amount to the Board and, therefore, the amount had remained unpaid. That lacuna now has been made good by the Amending Act of 1961. The scheme envisaged by this Act then is that if the ac cumulated balance is not paid to the employees for a period of three years since its accrual, it became payable to the fund and on the amount having been paid to the fund the employer was discharged of his liability towards his employees. Looking at the case from this point of view also, it becomes apparent that in the assessment year there was no cessation of liability within the meaning of section 10(2A). Mr. Joshi strongly argued that having regard to the provisions of section 13 and the method of account, the transfer of entries effected by the assessee would bring about a cessation of the liability. It is not possible to accept the said contention of Mr. Joshi. It is true that section 13 provides that income, profits and gains under section 10 or section 12 are to be computed in accordance with the method of accounting regularly employed by the assessee. But that does not mean that what is shown as the liability in the books of account of the assessee or what has been shown as the income in the books of account of the assessee would necessarily be liability or income within the meaning of the Act. The two principal methods of accounting known in the commercial world is the cash system and the mercantile system, i.e., maintaining of accounts on the accrual basis, that is, when the liability has accrued, showing it as a liability in the books of account irrespective of the fact whether the expenditure has been incurred or not, or the liability has been discharged or not. Similarly, showing to the credit side, the income that has accrued irrespective of the fact that the income has been received by the assessee or not, and the computation has to be made on that basis. The inclusion of the income that has accrued due in the total income of the assessee does not depend on its being shown as income in the books of account when the system of accounts is the mercantile one. Section 13 only provides that the computation of the income has to be made in accordance with the method of accounting regularly employed by the assessee. The decision on which Mr. Joshi has placed reliance also does not take the case any further: Ramkumar Kedarnath v. Commissioner of Income-tax. The Income-tax authorities sought to bring to tax in the hands of the assessee certain income, which had accrued to it, but which has not been shown in the books of the assessee though the method of accounting adopted by him was the mercantile one. The assessee had objected to the inclusion of the income on the ground that its debtors had got into financial difficulties and, therefore, the assessee feared that the income that had accrued to it would not be recoverable by it. On these facts it was held that in view of the system of accounting regularly adopted by the assessee, the assessee was bound to include the commission earned from July 1 to 31st December, 1953, and could rightly be assessed in respect of the same. The observations in the decision on which Mr. Joshi placed reliance were:

"Though an unpaid debt is not an income, it may be profits or gains if it is treated as profits or gains in the system of accounting adopted by the assessee." We find some difficulty in seeing how this passage helps Mr. Joshi for the contention raised by him. The observation has no bearing nor does it go to show that the entries made in the books of account of an assessee is decisive of any issue not requiring the income-tax authorities to look into the real state of affairs or prevent the assessee from showing the real state of affairs. No doubt, the assessee had transferred the entry to the credit of the profit and loss account, but had pleaded that his liability has not ceased and, therefore, the amount was not taxable. We, for reasons already stated, are of the view that there is no cessation of the liability in respect of the said amount within the meaning of section 10(2A) of the Act. An argument was also advanced that the assessee has obtained a benefit inasmuch as it has shown the said amount on the credit side of the profit and loss account and that the amount would be available for distribution amongst its shareholders. Now, on the language of section 10(2A), the benefit that is contemplated is a benefit by way of "remission or cessation of liability". Any other benefit is not contemplated. We have already said that this is not a case in which it could be said that there has been any remission of the liability on the part of the employers or there has been any cessation of the said liability. Assuming that the said amount is distributed by the company to its shareholders, it cannot get rid of its liability when it is called upon to meet it either by the employees under the Industrial Disputes Act or by the Government under the Bombay Labour Welfare Funds Act.

It is for these reasons, in our opinion, the answer to the question referred to us will have to be in favour of the assessee. We accordingly answer the question in the negative. The Commissioner shall pay the costs of the assessee.

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