1972 (5) TMI 6 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, salary, commission and bonus amounting to Rs. 1,19,118 accrued or arose to the assessee as an income for the relevant year - When the salary along with commission and bonus was payable annually to the managing director, if he foregoes the same prior to the closing of accounting year, whether it accrues to the assessee and whether it is taxable in his hands - Question answered in the negative

Issues Involved:
1. Accrual of Salary
2. Accrual of Commission
3. Accrual of Bonus
4. Taxability of Forgone Income
5. Interpretation of Relevant Sections of the Income-tax Act, 1922

Issue-wise Detailed Analysis:

1. Accrual of Salary:
The primary issue was whether the salary amounting to Rs. 60,000 accrued to the assessee during the relevant year. The assessee contended that he had forgone his salary due to the company's financial difficulties, and thus, it did not accrue to him. The Income-tax Officer and the Appellate Assistant Commissioner held that the salary accrued month by month and was taxable irrespective of its payment. However, the Tribunal found that the salary was forgone before it accrued, and thus, it did not constitute taxable income.

2. Accrual of Commission:
The commission of Rs. 44,116 was another point of contention. The Tribunal agreed with the assessee's argument that the commission, which was based on annual net profits, did not accrue during the relevant year as he had surrendered it before it became due. The Tribunal's decision was based on the principle that income must accrue or arise to be taxable, and in this case, the commission did not accrue due to the assessee's forgoing of the same before the end of the financial year.

3. Accrual of Bonus:
The bonus of Rs. 15,000 was also in question. The Tribunal held that the bonus did not accrue as it was declared after the close of the financial year and the assessee had forgone it before it became due. The Tribunal distinguished between income that accrues or arises and income that is merely forgone after it has accrued, concluding that the bonus did not accrue to the assessee during the relevant year.

4. Taxability of Forgone Income:
The core legal issue was whether the income that was forgone by the assessee before it accrued could be taxed. The Tribunal ruled in favor of the assessee, stating that forgoing the income before it accrued meant it never became the assessee's income. This decision was based on the interpretation that the right to income and the corresponding obligation to pay must exist for the income to accrue.

5. Interpretation of Relevant Sections of the Income-tax Act, 1922:
The relevant provisions considered were Section 4(1)(b) and Section 7 of the Income-tax Act, 1922. Section 4(1)(b) deals with the accrual of income, while Section 7 pertains to the taxability of salaries and related income. The Tribunal interpreted these sections to mean that income must accrue or arise to be taxable, and in this case, the income did not accrue due to the assessee's forgoing of the salary, commission, and bonus before they became due.

Conclusion:
The High Court upheld the Tribunal's decision, concluding that the salary, commission, and bonus did not accrue to the assessee during the relevant year as he had forgone them before they became due. The question referred to the court was answered in the negative, in favor of the assessee and against the revenue. The assessee was entitled to costs, with counsel's fee set at Rs. 500.

← Previous Next →