2012 (8) TMI 154 - HC - Income Tax

Disallowance of claim of unpaid liability in respect of salaries - ITAT allowed the claim - Held that - It would not be logical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the amount. Because with effect from 1-4-1997 by virtue of Finance Act, 1996 an Explanation was added to Section 41 which spells out that loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause . The expression include is significant as Parliament did not use the expression means . Necessarily, even omission to pay, over a period of time, and the resultant benefit derived by the employer/assessee would therefore qualify as a cessation of liability, albeit by operation of law - decided against assessee.

Summary

Issues:
Appeal against ITAT judgment on disallowance of unpaid salary liability.

Analysis:
1. The case involves an appeal by the revenue against an ITAT judgment regarding the disallowance of Rs. 32,28,724 towards unpaid salary liability claimed by the assessee for the assessment year 2006-07.

2. The facts reveal that the assessee had shown an unpaid liability of Rs. 38,51,893 on account of employees' dues, with a significant portion pertaining to previous years. The AO added this amount to the assessable income under Section 41(1) of the Income Tax Act, considering it as a cessation of liability. The CIT (A) later directed deletion of the amounts, which was upheld by the ITAT.

3. The argument presented by the revenue was that the liability had ceased due to the significant lapse of time without any payments made or actions taken by the assessee to address the dues. It was contended that the ITAT erred in not recognizing the benefit accrued to the assessee due to the wage liability becoming time-barred, citing relevant case law.

4. On the other hand, the assessee's representative argued that without any overt act altering the treatment of the wage liability or any other such action, the revenue could not treat the liability as profit. It was emphasized that the employees could seek legal recourse under the Industrial Dispute Act, making the assessee remediless in such situations.

5. The interpretation of Section 41(1) of the Income Tax Act was crucial in this case. The court examined the provisions and relevant case laws to determine whether the liability had ceased or not. The argument revolved around whether the mere lapse of time barring the recovery of dues could be considered as a cessation of liability.

6. The court referred to various judgments supporting both the revenue's position and the assessee's contentions. The distinction was made between cases where the liability had been unilaterally altered in the books and situations where the liability continued to be reflected without any changes.

7. Ultimately, the court ruled in favor of the revenue, holding that the lapse of time and the resultant benefit derived by the assessee qualified as a cessation of liability under Section 41(1). The court rejected the argument that the absence of a limitation period under the Industrial Disputes Act exposed the assessee to liability at any time, citing relevant Supreme Court precedent.

8. In conclusion, the court answered the question of law in the affirmative, in favor of the revenue, setting aside the orders of the Commissioner (Appeals) and the ITAT, and restoring the Assessing Officer's order. The appeal was allowed without any order on costs.