1972 (10) TMI 15 - HC - Income Tax

During the year the assessee-company had an income of Rs. 7,318 in the outstanding creditors account and this amount was on account of expenses claimed in earlier years. The assessee-company had maintained its accounts on mercantile basis, and even though the amount in fact was not paid, yet as the liability was incurred, it was allowed as expenses incurred in the earlier years. In the year of account relevant to the assessment year 1961-62, the amount was outstanding in the outstanding creditors account - Whether, on the facts and in the circumstances of the case, the amount of Rs. 7,318 could be included in the income of the assessee-company for the assessment year 1961-62, under the provisions of section 10(2A) or section 12(5)?

Summary

Issues:
- Whether the amount of Rs. 7,318 could be included in the income of the assessee-company for the assessment year 1961-62 under section 10(2A) or section 12(5)?

Analysis:
The case involved a reference under section 66(1) of the Indian Income-tax Act, 1922, regarding the inclusion of Rs. 7,318 in the income of an assessee-company for the assessment year 1961-62. The company had gone into voluntary liquidation, and the amount in question was on account of expenses claimed in earlier years but remained outstanding in the creditors' account during the relevant year. The Income-tax Officer added this amount to the total income of the company under section 10(2A) or alternatively under section 12(5). The company argued that as it had ceased business operations, the unclaimed liability should not be taxed. The Tribunal held that section 10(2A) applied as it deems certain amounts to be profits of business, which presupposes that business was carried on during the relevant year. The Tribunal rejected the company's contention and held the amount was taxable under section 10(2A).

The court considered two main questions: whether the amount could be included in the income of the company under section 10(2A) or section 12(5). Section 12(5) was deemed inapplicable as the sum was not taxed under the head "other sources" in earlier years. Regarding section 10(2A), the court analyzed the Gujarat High Court's decision in Baroda Tradeys Ltd. v. Commissioner of Income-tax, which emphasized the requirement of the existence of the business in the previous year for the application of sub-section (2A). The court highlighted that the sub-section creates fictions regarding profits or gains deemed to have accrued during the previous year. The court noted that the company had ceased business operations and obtained a benefit from the liability's remission or cessation. The court held that, following the Gujarat High Court's decision, the amount could not be taxed under section 10(2A.

In conclusion, the court emphasized the need for uniformity in interpreting an all India statute and decided in favor of the assessee-company based on the Gujarat High Court's decision. The court stated that the revenue could challenge this decision in a higher court. The court's answer to the question was in the negative, and the revenue was directed to pay the costs of the assessee-company.