1993 (5) TMI 62 - AT - Income Tax

Summary

Issues Involved:

1. Whether the salary accrued to the assessee and is includible in her hands for the assessment years 1981-82 to 1984-85.
2. The applicability of Section 15(a) of the Income-tax Act to the salary income of the assessee.
3. The effect of the resolution passed by the Board of Directors and the Annual General Meeting regarding the write-off of the salary.
4. The impact of the financial condition of the company and the requirement of approval from financial institutions on the accrual of salary.

Issue-wise Detailed Analysis:

1. Whether the salary accrued to the assessee and is includible in her hands for the assessment years 1981-82 to 1984-85:

The core issue in these appeals is whether the salary accrued to the assessee and is includible in her hands. The assessee, an ex-MLA and Managing Director of Kalpana Tanning Materials Ltd., did not include her salary in her returned incomes for the assessment years 1981-82 to 1984-85. The Income Tax Officer (ITO) reopened the assessments and included the salary accrued to the assessee, which was previously not assessed. The amounts were Rs. 12,330 for 1981-82, Rs. 16,200 for 1982-83, Rs. 17,550 for 1983-84, and Rs. 18,000 for 1984-85. The Appellate Assistant Commissioner (AAC) initially upheld the ITO's application of Section 15 of the Income-tax Act but later set aside the assessments for further investigation.

2. The applicability of Section 15(a) of the Income-tax Act to the salary income of the assessee:

The ITO argued that the salary became due when it accrued, and the subsequent surrender by the assessee did not obliterate the accrual. According to Section 15(a) of the Income-tax Act, salary becomes chargeable to tax with reference to the previous year in which it fell due, not on the basis of actual receipt. The AAC found that the ITO included the salary income in the hands of the employee, purportedly following Section 15(a), though the assessee did not receive any salary. The AAC deleted the income added under 'salary' for all four years, directing the ITO to compute the income accordingly.

3. The effect of the resolution passed by the Board of Directors and the Annual General Meeting regarding the write-off of the salary:

The Board of Directors passed a resolution on 9-7-1986 writing off the salary accrued and payable to the assessee, which was subsequently approved by the Annual General Meeting on 29-9-1986. The resolution stated: "To write back the provisions for salaries of Rs. 60,930 due to the Managing Director in view of the written consent of the Managing Director to give up her claim in view of the continuous losses to the company." The AAC considered these developments and concluded that the salary should not have been included in the assessee's income, as the write-off was approved by the General Meeting.

4. The impact of the financial condition of the company and the requirement of approval from financial institutions on the accrual of salary:

The assessee's salary was subject to the company generating surpluses and obtaining prior written approval from financial institutions (APSSIDC/SFC). The company incurred continuous losses, and no approval for salary drawal was obtained. The Tribunal noted that the payment of salary to the assessee was not automatic and depended on the company's financial condition and approval from financial institutions. The Tribunal agreed with the AAC's finding that the salary did not become due, as the company did not generate surpluses, and the required approvals were not obtained.

Conclusion:

The Tribunal concluded that the salary income did not accrue to the assessee in any of the four assessment years in question. The Tribunal upheld the AAC's order, stating that Section 15(a) of the Income-tax Act does not apply automatically in this case. The appeals filed by the revenue were dismissed, and the Tribunal found no valid ground to interfere with the AAC's order.