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TMI Blog1979 (9) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... ence briefly are as follows The assessee, Sardar Arjunsingh Ahluwalia, who was assessed as an individual, died during the pendency of these proceedings and he is represented by his legal representative, Smt. Manjit Ahluwalia. The assessment years in question are 1966-67 and 1967-68 for which the accounting periods ended respectively on 31st March, 1966, and 31st March, 1967. In the assessment year 1966-67, the assessee received, a sum of Rs. 10,000 and in the assessment year 1967-68, the assessee received a sum of Rs. 65,532 from M/s. Kalyanmal Mills Ltd., Indore. These sums were received by the assessee in pursuance of a final decree passed by the learned Additional District Judge, Indore, in a suit for accounts instituted by the assessee against M/s. Kalyanmal Mills Ltd., Indore. The case of the assessee in that suit was that by an agreement dated 2nd January, 1946, the assessee, who was employed as a personal assistant to the managing director of M/s. Kalyanmal Mills Ltd. and was carrying on business in the name of M/s. A. Ahluwalia Sons, was appointed, on the terms and conditions mentioned in that agreement, to look after and supervise the waste department of the mills, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee in the assessment year 1966-67 and, after allowing an expenditure of Rs. 3,601, he taxed the balance amount of Rs. 61,931 in the assessment year 1967-68. It was contended before the ITO that the agreement referred to above created the relationship of a master and servant and the amount received by the assessee as aforesaid should be assessed not on receipt basis but on accrual basis. The ITO did not accept this contention and held that as neither the mills rendered any accounts to the assessee nor was the assessee maintaining any accounts, the amount had to be taxed on receipt basis. On appeal, the AAC agreed with the conclusions to which the ITO had arrived and confirmed the impugned order except for some minor modifications. Against this order of the AAC, the assessse went up in appeal before the Tribunal. It was contended before the Tribunal on behalf of the assessee that the relationship that was created by the agreement between the assessee and the mills was that of a master and servant and not that of a principal and his agent. The Tribunal examined the clauses of the agreement and held that the most important clause in the agreement was that all sales and purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been found by the Tribunal that the relationship between the assessee and the mills, arising out of the agreement dated 2nd January, 1946, was that of an employer and an employee. The remuneration received by the assessee from the mills in the assessment years 1966-67 and 1967-68 in accordance with the final decree would, it was not disputed before us in view of the finding of the Tribunal, amount to receipt of arrears of salary by the assessee paid to him by his former employer. Shri Chitale, learned counsel for the assessee, contended, relying upon the decision, Bhuban Mohan Banerjee v. CIT [1956] 29 ITR 229 (Cal), that the amount received by the assessee in the assessment years 1966-67 and 1967-68 from the Kalyanmal Mills Ltd. being in the nature of salary, the said income had accrued to the assessee in the assessment years 1946-47 and 1947-48, and as salary was always chargeable to income-tax on accrual basis, the said income could not be assessed in the assessment years 1966-67 and 1967-68. The decision in Bhuban Mohan Banerjee v. CIT [1956] 29 ITR 229 (Cal) no doubt lays down that if any of the kinds of payment contemplated by s. 7(1) of the Indian I.T. Act, 1922, beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of salary received by him in a year were charged to income-tax in accordance with the provisions of s. 15(c) of the Act, has provided relief under the provisions of s. 89 of the Act. However, that is a matter which cannot have any bearing on the question of construction of s. 15(c) of the Act. That provision is independent of the provision contained in s. 15(a) of the Act and has to be given effect to, according to the plain meaning of that provision. Whereas s. 15(a) of the Act provides that salary due from an employer in the previous year is taxable on accrual basis, s. 15(c) of the Act provides that arrears of salary received by an assessee in the previous year are taxable on receipt basis, if not subjected to charge earlier on accrual basis under cl. (a) of s. 15 of the Act. In my opinion, therefore, in view of the provisions of s. 15(c) of the Act, the answer to the first question referred to us must be in the affirmative. Now, so far as the second question referred to us is concerned, the question formulated by the Tribunal does not, with respect to the Tribunal, bring out the real issue between the parties which is, whether the Tribunal was justified in holding, on the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' occur repeatedly in the Ordinance, e.g., in s. 4, sub-s. 1(a)(b)(c)(d) and (e), coupled with the words 'and derived from' or 'or derived from'. Sometimes the expression 'derived from' is used alone, s. 5, sub-s. 1(a)(c)(g)(i) and (ii). The respondent contends that the above interest 'accrued ' to the company in the year 1921, because it was payable in that year and none the less because it wag not paid in that year. Their Lordships do not agree. The words 'income arising or accruing' are not equivalent to the words ' Debts arising or accruing'. To give them that meaning is to ignore the word 'income'. The words mean 'money arising or accruing by way of income'. There must be a coming in to satisfy the word 'income'. This is a sense which is assisted or confirmed by the word ' received ' in the proviso at the end of s. 4, sub-s. 1." It is true that the Privy Council was construing the provisions of the Income-tax Ordinance, 1910, of St. Lucia, but the words, the construction of which the Privy Council was considering in the aforesaid case, are the same as those in the Indian statute. From the aforesaid observations, it follows that it is one thing to say that a claim accrued to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out by Fry L.J. in Colquhoun v. Brooks [1888] 21 QBD 52 (CA)--this part of the decision not having been affected by the reversal of the decision by the House of Lords in [1889] 14 App Cas 493 (HL)--that both the words are used in contradistinction to the word "receive" and indicate a right to receive. They represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate. One other matter need be referred to in connection with the section. What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called "income" '. " It must, therefore, now be taken to be well settled that income may accrue to an assessee before he actually receives it and that income cannot accrue to him until he acquires a right to receive it. But from these propositions it does not follow that merely because a person has acquired a right to receive income, it can be said, without making any further enquiry, that income has accrued to him. Acquisition of a right to receive income may, in cases where the mercantile system of accounting is followed and entries are m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixed under the Income-tax Act, to reopen the assessment in which he had included the initial compensation awarded by the Collector and recompute the entire income on the basis of the final compensation ? We do not think there can be any justification for such a proposition On a proper construction of the terms 'accrue' or 'arise' we are of the view that such an interpretation cannot be placed. The interpretation given by us does not affect the interests of the revenue. " The principle enunciated in the aforesaid decision would, in my opinion, be applicable to a case where, as in the instant case, an amount was claimed under the contract but as the claim was disputed, the amount became payable as a result of the decision of a court. Holding otherwise would mean, that a mere claim to an amount would be tantamount to accrual of income of the amount claimed. In the instant case, the Kalyanmal Mills Ltd. had denied their liability to pay any amount to the assessee under the agreement dated 2nd January, 1946. When the trial court passed a preliminary decree directing that accounts be taken for the years 1946 to 1960, the matter was taken up in appeal by the mills and the High Court r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing income shall be chargeable to income-tax under the head 'Salaries'- (a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not ; (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though riot due or before it became due to him ; (c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year. Explanation.-For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due." It is significant that under this section the income under the head Salaries " has been made chargeable to income-tax in a particular manner. In cl. (a) of this section salary has been made chargeable to income-tax when it became due and specific words "whether paid or not" have been used in this clause to eliminate all controversies and doubts which might arise because of the general provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olved in this reference is about the construction of s. 15. Section 15, cl. (a), makes salaries chargeable to income-tax when it became due and it has been specifically made clear that it will be so chargeable even if it is not paid as the last words in cl. (a) read "whether paid or not". Thus, while interpreting the provisions contained in s. 15 we will have to read the whole section in order to understand its meaning. Section 15, cl. (c), is especially the provision which is the subject-matter of controversy before us and it is also worth noticing that this problem has arisen because of the peculiar facts of this case. The contract of employment under which this remuneration or salary is received by the assessee was in force, according to the decision of the High Court in the years 1946-47 and 1947-48. It is also not in dispute that at that time Indore was part of the erstwhile Holkar State which was not a taxable territory under the Indian I.T. Act. As the employer, i.e., Kalyanmal Mills, did not pay the remuneration in time, as it is stated that it disputed the claim, it became the subject-matter of litigation which ultimately was settled by a decision of this court dated 10t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cording to Lord Simonds, in interpreting a section in a taxing statute, the question is not at what transaction the section is according to some alleged general purpose aimed, but what transaction its language according to its natural meaning fairly and squarely hits. The learned author has quoted the observations of Bhagwati J. from the Supreme Court in the following words : " In construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law. If the revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter." It is, therefore, clear that while interpreting the provisions contained in s. 15(c) it is not necessary to draw inferences on the basis of the relief that has been provided in s. 89, in order to understand the intention of the legislature. What is to be considered is as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or commission paid. In carrying out that intention, however, and putting it into words, the Legislature adopted a form of expression which it is by no means easy to construe. To take the first block of the words which I have described as crucial, they are 'which are due to him from, whether paid or not'. It appears to me that those words cover all sums which are due, irrespective of whether they are paid or not paid and, therefore, of amounts due, the portion due and paid as well as the portion due and not paid, are both covered. When amounts are due from the employer to the employees, they may be due and may be paid off. They may also be due and remain wholly unpaid. Lastly, they may be due and may be paid in part while a part remains unpaid. All these various contingencies are, to my mind, amply covered by the words, 'which are due to him from, whether paid or not'. What then was intended to be added or is actually added by the next block of words, namely, 'or are paid by or on behalf of' ? If it be said that those words were used in order to cover sums due and paid, that purpose has already been served by the first block of words, as I have just explained. If the amounts conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) does not deal with and does not contemplate any alternatives at all and no question of any option of either the Income-tax Officer or the assessee arises. It deals with and contemplates different kinds of income or payment, chargeable in different circumstances or contingencies. It is addressed to the amounts themselves and not to either the assessees or the taxing officer and its object is to declare the taxability of the amounts in the circumstances specified. The object is not to confer any option on anybody." As regards the first clause of s. 15, i.e., s. 15(a), it could not be disputed that the salary would be chargeable to income-tax when it fell due, whether paid or not paid. Clause (c) of s. 15 provides for arrears of salary only "if not charged to income-tax for any earlier previous year". This phrase at the end of cl. (c)--"if not charged to income-tax for any earlier previous year"--in my opinion, is a phrase which controls the operation of cl. (c); and in order to find out whether it was charged to income-tax in any earlier previous year we will have to fall back to cl. (a) to find out in what year it would be charged to income-tax as cl.(a) clearly indicates th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e chargeable now. In this view of the matter, I fail to agree with the opinion expressed by my learned brother, Sohani J. Therefore, my answers to the questions referred to us are in the negative. ORDER OF REFERENCE In view of the difference of opinion between us we order that the record be placed before Hon'ble the Chief justice under the provisions of s. 259(2) of the I.T. Act, 1961, for nominating the third judge to decide the matter on both the following questions : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the income of the assessee became liable to be assessed in the assessment years 1966-67 and 1967-68, and not in the years 1946-47 and 1947-48 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the remuneration received by the assessee from the Kalyanmal Mills Ltd. in the assessment years 1966-67 and 1967-68, pursuant to the final decree passed in favour of the assessee on 14th December, 1965, could not be held to be the income of the assessee which had accrued to him in the assessment years 1946-47 and 1947-48. " G. P. SINGH C.J. (4-9-7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted it to the period during which the agreement was in force, i.e., for the period from 2nd January, 1946, to 9th November, 1948. The final decree in the suit was passed on 14th December, 1965. In pursuance of the final decree, the assessee was paid Rs. 10,000 between 1st April, 1965, to 30th March, 1966, and Rs. 65,532 between 1st April, 1966, and 31st March, 1967. The aforesaid amounts were brought under assessment in the assessment years 1966-67 and 1967-68, respectively. The income-tax authorities, including the Tribunal, held that the relationship created by the agreement between the mills and the assessee was that of master and servant and the remuneration payable under the agreement was taxable under the head "Salary". It was also held that as the mills had disputed their liability to pay remuneration to the assessee and the assessee had to file the suit, it could not be said that the remuneration became due before 14h December, 1965, when the final decree was passed in the suit, and that the remuneration accrued and became due only when the final decree was passed. The Tribunal did not accept the argument that the remuneration became due between 1946 and 1948 and was not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The conditions for applicability of cl. (c) are two-fold : (i) that the arrears of salary were paid or allowed in the previous year relevant to the assessment year in question; and (ii) that the arrears so paid were not charged to income-tax for any earlier previous year. Both the conditions are satisfied in the present case. The payment under the decree on the finding that there was a relationship of master and servant between the assessee and the mills constituted payment of arrears of salary. This payment was made during the previous years relevant to the assessment years 1966-67 and 1967-68. It is also not disputed that the arrears so paid were not charged to income-tax for any earlier previous year. Both the conditions relevant for the application of s. 15(c) being satisfied, the payments, in my opinion, were rightly held to be taxable by the Tribunal in the assessment years 1966-67 and 1967-68. I do not find any justification for any further qualification for application of cl. (c) that the arrears must be such that they could have been charged under cl. (a) of s. 15 at the time they became due. The construction adopted by Oza J., that "clause (c) of s. 15 will only come int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y such relief as may be allowed to him under s. 89. Agreeing with Sohani J., I would answer question No. 1 in the affirmative and in favour of the department. As regards the second question, Oza J. was of opinion that the remuneration under the agreement became due between 1946 and 1948, although the amount of remuneration was not ascertained. According to Sohani J., the remuneration was merely a claim till it was ascertained in the suit and, therefore, it became due only when the final decree in the suit was passed. Having given my anxious consideration to the problem, I am inclined to agree with Oza J. on this point. Sohani J., in support of his view, quoted certain observations of the Privy Council in St. Lucia Usines and Estates Co. Ltd. v. Colonial Treasurer of St. Lucia [1924] AC 508, which were made while construing the provisions of the Income Tax Ordinance of St. Lucia. Lord Wrenbury, who delivered the judgment of the Privy Council in that case, construed the words "income arising or accruing" as money arising, or accruing by way of income and not "debts arising or accruing". The Supreme Court in CIT v. K.R.M.T.T. Thiagaraja Chetty Co. [1953] 24 ITR 525 referred to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is whether there is a debt owed to the assessee by somebody. To quote the words of the Supreme Court : "If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro : See W.S. Try Ltd. v. Johnson (Inspector of Taxes) [1946] 1 All ER 532 at 539 (CA) and Webb v. Stenton [1883] 11 QBD 518, 522, 527 (CA). Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him." In Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 the Supreme Court held that the liability to pay income-tax becomes a perfected debt on the close of the accounting year though it becomes payable after it is quantified in accordance with the ascertainable data. It was pointed out in that case that a debt is a sum of money which is now payable or will become payable in f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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