1966 (2) TMI 73 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of undrawn and unpaid wages, salary, and bonus under Section 10(2A) of the Indian Income-tax Act, 1922.
2. Interpretation of "remission or cessation" of liability under Section 10(2A).
3. Impact of the method of accounting on tax liability.
4. Applicability of the Bombay Labour Welfare Funds Act, 1953.

Detailed Analysis:

1. Taxability of Undrawn and Unpaid Wages, Salary, and Bonus under Section 10(2A) of the Indian Income-tax Act, 1922:
The primary issue was whether the amount of Rs. 5,929, which was undrawn and unpaid to employees but previously allowed as deductions, could be assessed as income under Section 10(2A) for the assessment year 1958-59. The Income-tax Officer included this amount in the assessee's total income, a decision upheld by the Appellate Assistant Commissioner and the Tribunal. The Tribunal reasoned that the company had obtained a benefit when it transferred the undrawn amounts to its profit and loss account, treating it as if available for distribution as dividends.

2. Interpretation of "Remission or Cessation" of Liability under Section 10(2A):
The court examined whether the mere reversal of accounting entries constituted "remission or cessation" of the liability. The assessee argued that the liability for wages, salaries, and bonuses had neither been remitted by the employees nor ceased to exist. The court agreed, stating that the mere reversal of entries could not effectuate a remission or cessation of liability. The court emphasized that remission must be granted by the creditor and cessation could not be achieved unilaterally by the debtor.

3. Impact of the Method of Accounting on Tax Liability:
The court analyzed the relevance of the mercantile system of accounting adopted by the assessee. The court noted that while Section 13 of the Income-tax Act requires income computation according to the method of accounting regularly employed by the assessee, this does not mean that entries in the assessee's books are decisive of liability or income. The court referenced the Kohinoor Mills case, which held that the expiry of the limitation period does not constitute cessation of liability.

4. Applicability of the Bombay Labour Welfare Funds Act, 1953:
The court also considered the implications of the Bombay Labour Welfare Funds Act, 1953. According to this Act, unpaid accumulations, defined as payments due to employees but unpaid for more than three years, must be transferred to the Labour Welfare Fund. The court noted that the amount of Rs. 5,929 fell within this definition and had not been transferred due to a lacuna in the Act, which was later rectified by the Amending Act of 1961. Thus, the liability had not ceased, and the amount was not taxable under Section 10(2A).

Conclusion:
The court concluded that the amount of Rs. 5,929 could not be taxed under Section 10(2A) as there was no "remission or cessation" of liability. The transfer of entries in the books of account did not constitute a cessation of liability. The court answered the referred question in the negative, ruling in favor of the assessee and directing the Commissioner to pay the costs of the assessee.