AMBICA MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX
LAWS(GJH)-1963-8-3
HIGH COURT OF GUJARAT
Decided on August 30,1963

AMBICA MILLS LTD. Appellant
VERSUS
COMMISSIONER OF INCOME TAX Respondents

JUDGEMENT

J.M.SHELAT, J. - (1.) THIS reference relates to the asst. yrs. 1955 56, 1956 1957 and 1957 1958 of which the relevant previous years are the calendar years 1954,1955 and 1956. Two questions arise in this reference. The first question is common to all the three assessment years are relates to certain unclaimed wages and the second question relates only to the asst. yrs. 1956 1957 and 1957 1958 and is as regards certain deductions claimed by the assessee company in regard to expenses incurred in connection with tours abroad by two of the directors of the assessee company who were also the partners in the managing agency firm and an employee of the assessee company.
(2.) THE assessee company is a public limited company and carries on business of manufacturing textiles. It maintains accounts according to the mercantile system. The expenses for wages to the employees engaged for carrying on the business of the company were shown in the accounts as liabilities as and when the accrued. In other words, irrespective of the payment of the wages, the assessee company used to take into account the wages due to employees and labourers and the entire sum so due was shown as a deduction in its accounts and also allowed as such in the income tax assessments made on the company. It sometimes happened that all the workers did not turn up to collect their dues and consequently, a portion of the wages in each year remained unpaid and such unpaid wages used to be transferred to an account called "unpaid wages account" . As and when the workers turned up to take their unclaimed wages, such amounts used to be paid to them and debited to the unpaid wages account. A separate account used to be maintained for each year in respect of such unclaimed wages. The unclaimed wages relating to the calendar years 1947 to 1949 were transferred to the general reserve fund and the amounts so transferred were brought to tax. The following were the unclaimed wages relating to the year 1950 and the subsequent years : These unclaimed wages were shown as liabilities and formed part of the liabilities shown in the balance sheets of each year under the heading "other finance". These amounts included in the liabilities under the heading "other finance" and shown in the balance sheet were as follows : Thus for the asst. year 1955 56, the sum involved came to Rs. 13,783 being the unclaimed wages for the years 1950 and 1951. For the asst. year 1956 57 the unclaimed wages came to Rs. 1,305 the being such for the year 1952 and for the asst. year 1957 58 the unclaimed wages came to Rs. 2,543 in respect of the year 1953. The ITO brought to tax these amounts of unpaid wages relating to the calendar years 1950 and 1951 namely, Rs 13,783, in the asst. year 1955 56. Similarly, the amounts of unpaid wages relating to the calendar years 1952 and 1953 were also added to the profits in the assessments made for the asst. yrs. 1956 57 and 1957 58. The reason given by the ITO for including these amounts in the profits during the assessment years was that as regards the balance of unclaimed and unpaid wages for the years 1950 and 1951 amounting to Rs 13,783, there was no possibility of these amounts being paid to the floating labourers, and he applied the same reasoning to the amounts of unpaid wages for the subsequent years 1952 and 1953 and treated them as taxable income. When Years Unclaimed wages . Rs. 1950 2,869 1951 10,914 1952 1,305 1953 2,543 Balance sheet as at Liabilities for "other finance" Unclaimed wages included therein . Rs. Rs. 31 12 1950 1,87,283 84,104 31 12 1951 2,06,678 93,596 31 12 1952 2,36,814 1,17,921 31 12 1953 4,97,390 21,305 31 12 1954 2,50,626 25,724 31 12 1955 2,37,552 43,405 31 12 1956 2,03,967 32,948 the case went before the AAC, it was contended on behalf of the assessee company that the balances of unclaimed wages had been carried forward in the balance sheets as liabilities from year to year they constituted, therefore, a debt due from the company to its employees, that the assessee company had neither obtained any remission in respect of these liabilities nor had these liabilities ceased in any manner and that, therefore, there was no justification in treating these unpaid wages as income of the assessee company under S. 10(2A). This contention was negatived by the Asstt. CIT on the ground that the liability of the assessee company in respect of these amounts had become time barred as more than three years had already elapsed since those wages became due and he concluded that when the creditors legal remedies for recovery have ceased, the legal liability also ceased and the provisions of S. 10(2A) would then come into play. The Asstt. CIT also observed that if the assessee's views were to be accepted it would mean that an assessee would indefinitely postpone taxation on such amounts by simply not transferring to the profit and loss account such reserve funds and that such position could hardly be accepted. Upon this reasoning, the Asstt. CIT dismissed the appeals of the assessee company. The assessee company then took the matter in appeal before the Tribunal where two contentions were put forward : (1) that inasmuch as the assessee company had acknowledged its indebtedness by carrying forward these unclaimed wages as outstanding liabilities in its annual balance sheets as at the end of each year the debts owed by the company to the labourers were not time barred; and (2) that even if such debts could be said to have become time barred, S. 10(2A) could not apply to such a case as the assessee company could not be said to have received, whether in cash or in any manner whatsoever, any amount in respect of such expenditure. It may be observed that the case before the Tribunal proceed on the footing that these amounts were expenditure incurred and not on the footing of trading liability having ceased to exist as a result of remission or cessation. The Tribunal did not accept either of these two contentions and dismissed the assessee's appeals. The Tribunal assumed all along that these amounts had become time barred and, therefore, had ceased to be payable by the assessee company to the labourers and upon that assumption, held that the assessee company must be held to have received those amounts either in cash or in any other manner and that even if such amounts could not be said to have been received in cash, the words "in any other manner" were wide enough to cover such a case where the creditor was unable to claim payment of a debt due to him by reason of the period of limitation having expired. The Tribunal also held that if an assessee company, in a subsequent year, were to acknowledge its indebtedness through a balance sheet prepared for instance, as on the 31st of December, 1953, such an acknowledgment would come a year late, i.e., later than the moment when such amount of unpaid wages became fictionally stamped with the character of "profits and gains of business" for the purpose of 10(2A), and once such an amount became so impressed, it was immaterial whether by a subsequent and a separate transaction, the assessee company chose to pay that amount to the labourer by acknowledging ex gratia its indebtedness publicly through its balance sheet. The Tribunal, upon this reasoning, dismissed the assessee's appeals in respect of all the three assessment years. At the instance of the assessee company, the Tribunal referred on this part of the case the following questions common to all the three assessment years : "(1) Whether on the facts and in the circumstances of the case, the sum of Rs. 13,783, Rs. 1,305 and Rs. 2,643 are assessable under S. 10(2A) of the IT Act in the assessment for 1955 56, 1956 57 and 1957 58 respectively ? (2) Whether on the facts and in the circumstances of the case, the decision of the Tribunal that the debts are time barred is correct in law ?"
(3.) THE question therefore is whether the liability in respect of the unpaid wages payable during the calendar years 1950 to 1953 had become time barred during the assessment years and consequently extinguished, as assumed by all the three tax authorities. It is only if it was time barred that the next question would arise, viz., whether under S. 10(2A) these amounts treated as expenditure incurred could be said to have been received by the assessee company either in cash or in any other manner whatsoever. Mr. Kaji's contentions were that it was an admitted fact that the assessee company used to acknowledge publicly its liability in respect of these unpaid wages in the balance sheets at the end of each year, that is to say, 1950, 1951, 1952 and 1953, and that therefore, as a result of such acknowledgment, the debt of the assessee company in respect of these unclaimed and unpaid wages remain outstanding and the assessee company continued to be liable to pay those amounts. He also contended that even if these debts were said to be time barred, S. 10(2A) would not in any case apply in the instant case as it cannot be said that the assessee company had received either in cash or in any other manner whatsoever, the aforesaid expenditure or any part thereof. In our view, there is considerable justification in the first contention of Mr. Kaji and that being so, it would not be necessary for us to go into the second contention raised by him.;


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