TMI Blog1985 (2) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... 31-3-1967 10,185.57 ------------------ 50,061.61 ------------------ The Income-tax Officer in the above assessment year added the said amount of Rs. 50,061 in respect of unpaid bonus to the total income of the assessee without any discussion. The assessee, accordingly, took up the matter in its objection to the draft assessment order under section 144B with the Inspecting Assistant Commissioner of Income-tax. It Was stated that the above amount of Rs. 50,061 represented unclaimed bonus due by the assessee to its workers. Although the said amount had been written back in the accounts, it could not be said that the liability of the company in that behalf had been extinguished. In the present case, there was neither remission nor cessation of the said liability in terms of section 41 (1) of the Act and as such the obligation of the assessee to pay unclaimed bonus to its workers, when they claimed the same, exists in law. The said amount cannot represent the income of the assessee. The said stand of the assessee bad, however, been negatived by the Income-tax Officer in the final order, as according to him, after the above amount had been credited to the profit and loss acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e concerned with the interpretation of section 41(1) of the Income-tax Act, 1961, which reads as follows: " 41(1). Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. " Thus, the provisions of section 41(1) have application only if, (i) an allowance or deduction had been made, in the computation of profits and gains of a business or profession, in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and (ii) subsequently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is a pending dispute regarding the payment of bonus, bonus has to be paid within the period of eight months from the close of the accounting year. However, upon an application being made to the appropriate Government, the period of eight months may be extended, but the total period so extended, shall not, in any case, exceed two years. In this case, bonus remained unpaid for several years. It is not the case of the assessee that any dispute is pending as regards the payment of bonus. It is not also the case of the assessee that upon an application being made to the appropriate Government, time to pay bonus has been extended. Section 21 of the Bonus Act provides the mode of recovery of bonus due from an employer. Where any money is due as bonus from an employer, the employee may make an application to the appropriate Government for the recovery of the money due to him. The amount of bonus may be payable under a settlement or an award or an agreement. If the appropriate Government is satisfied that the money claimed is due to the employee, it shall issue certificate for that amount to the Collector who shall recover that amount as arrears of land revenue. Every application for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability still exists. It is, therefore, necessary to consider the decision of this court. In that case, the assessee transferred Rs. 3,45,000 out of the suspense account running from 1946-47 to 1948-49 to its capital reserve account. The Income-tax Officer found that out of the above sum, an amount of Rs. 2,56,529 represented liabilities for expenses which had been allowed in the earlier years. By applying section 41 of the Act, he included this amount in the total income of the assessee. The Appellate Assistant Commissioner confirmed the view taken by the Income-tax Officer. The assessee came up in further appeal to the Tribunal. The Tribunal was of the opinion that the liabilities for expenses arose for 1948-49 and these amounts became barred by limitation. When the liability became barred by limitation, I here was neither a remission nor a cessation of the liabilities. The liabilities are not extinguished. The Tribunal, therefore, held that the amount in question cannot be taxed under section 41 (1) of the Act. This court considered the decision in the case of Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578 (Bom), where the decision of the Supreme Court in the case of Bombay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n end on his own volition. Thus, we are of the opinion that the Tribunal was right in holding that there was neither a remission nor cessation of the trading liabilities in this case and, thus, the provisions of section 41(1) of the Act would not be attracted." In the case of Bombay Dyeing Mfg. Co. Ltd. v. State of Bombay, AIR 1958 SC 328, the Supreme Court was considering the provisions of the Bombay Labour Welfare Fund Act, 1953. In that case, constitutional validity of the provision of section 3 of the said Act was the main point for determination by the Supreme Court. Under the provisions of the said Act, "unpaid accumulations" being "all payments due to the employees but not made to them within a period of three years from the date on which they became due whether before or after the commencement of this Act including the wages and gratuity legally payable " shall be paid into the fund called the Bombay Labour Welfare Fund notwithstanding anything contained in any other law for the time being in force. It was contended that the said Act merely substitutes the Board as the creditor in place of the employer. The Supreme Court held that the effect of the relevant provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emedy. It does not extinguish the debt or preclude its enforcement, unless the debtor chooses to avail himself of the defence and specially pleads it. An indebtedness does not lose its character as such merely because it is barred, it still affords sufficient consideration to support promise to pay, and gives a creditor an insurable interest.' In Corpus Juris Secundum, Vol. 53, page 922, we have the following statement of the law : `The general rule, at least with respect to debts or money demands, is that a statute of limitation bars, or runs against, the remedy and does not discharge the debt or extinguish or impair the right, obligation or cause of action. ' The position then is that under the law a debt subsists notwithstanding that its recovery is barred by limitation and no argument has been addressed to us by the appellant that the transfer of such a debt is invalid; and indeed it could not be, in view of the provisions in the impugned Act, which release the debts due to the employees from the bar of limitation. Section 3(1) provides that payment shall be made of the amounts specified in sub-clause (2) 'notwithstanding anything contained in any other law for the time b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either from the nature of the contract, or from its terms, it be limited in point of duration. But though the right possesses this permanent character, the remedies arising from its violation are withdrawn after a certain lapse of time; interest reipublicae ut si finis litium. The remedies are barred, though the right is not extinguished. " And if the law requires that a debtor should get a discharge before he can be compelled to pay, that requirement is not satisfied if he is merely told that in the normal course he is not likely to be exposed to action by the creditor. " The Supreme Court also considered that even when a claim for wages falls within the purview of the Payment of Wages Act and an application under section 15 of that Act would be barred, it can nevertheless give rise to an industrial dispute in respect of which a dispute can be taken under the provisions of the Industrial Disputes Act. The result, therefore, is that when an employer makes a payment under section 3(1) of the Bombay Labour Welfare Fund Act, he gets no discharge from his obligation to the employees, even when the enforcement thereof is barred by limitation. The Supreme Court further observed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of law laid down by their Lordships, it is hardly possible to sustain the view taken by the Tribunal that the trading liability incurred by the assessee in respect of the said amount of Rs. 30,190 had ceased to be its trading liability in the year 1955 by reason of the expiry of the period of three years." The Bombay High Court in the case of J. K. Chemicals Ltd. v. CIT [1966] 62 ITR 34, again considered the question. The assessee-company, which kept its accounts on the mercantile system, debited the accounts as and when it incurred any liability on account of wages, salary or bonus due to its employees even though the amounts were not disbursed in cash to the employees, and obtained deduction of the amounts so debited in the respective years in computing its total income. Certain portion of the wages, salary and bonus, so debited, was in fact not drawn by the employees. On June 30, 1957, a sum of Rs. 5,929 which had remained undrawn but had been allowed to be deducted during the accounting years 1945 to 1953 was credited to the profit and loss account of the said year. The Department included this amount in the total income of the accounting year on the ground that the trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. CIT [1963] 49 ITR 578. The ratio of this case has been well summarised in its placitum in the following terms: `Where wages are payable but they are unclaimed and their recovery is barred by limitation, the position in law is that the debt subsists, notwithstanding that its recovery is barred by limitation. There is in such case no " cessation of trading liability " within the meaning of section 10(2A) and the amount of such wages cannot be added to the income.' As already stated, Mr. Joshi does not dispute the correctness of this decision. He, however, contends that the decision has no application where the assessee has himself failed to show the trading liability and has transferred the said liability to the credit of its profit and loss account, and that transfer of the entries in the aforesaid manner brings about remission or cessation of the trading liability. This also appears to be the view taken by the Tribunal. The question to be considered is whether the transfer of these entries brings about a remission or cessation of its liability. The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Allahabad High Court in the case of Pioneer Consolidated Company of India Ltd. v. CIT [1972] 85 ITR 410, held that money due by the assessee company to its constituents, but not claimed by them and transferred to the profit and loss account of the company was the income of the assessee in the accounting year in which it was so transferred. The same view was taken by the Allahabad High Court subsequently in the case of the same assessee: Pioneer Consolidated Company of India Ltd. [1976] 104 ITR 686. In Bombay Dyeing Mfg. Co. Ltd.'s case, AIR 1958 SC 328, the Supreme Court held that the Bombay Labour Welfare Fund Act, 1953, did not discharge the employer from his liability to pay the employees unclaimed wages even though the employer makes over the unclaimed wages to the fund constituted under the said Act. In Kohinoor Mills Ltd.'s case [1963] 49 ITR 578 (Bom), the assessee did not credit in its accounts any unclaimed wages because of the provisions of the said Bombay Labour Welfare Fund Act under which the unclaimed wages were directed to be paid to the Bombay Labour Welfare Fund constituted under the said Act. The Income-tax Officer, however, treated in that year, the unclaim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h accumulated balance was paid to the fund constituted under the said Act. It does not appear from the facts narrated in the judgment in Sugauli Sugar Works P. Ltd.'s case [1983] 140 ITR 286, what is the nature of the " liability for expenses ". It appears, however, that one of the "liabilities " was in respect of the unsecured loan. Accordingly, the general principle that a statute of limitation bars or runs against the remedy and does not discharge the debt was applied on the facts of that case. Whether a trading liability that was once incurred ceases to exist for the purpose of section 41 (1) has to be decided in the light of the provisions of the Income-tax Act, 1961, and the statute, if any, governing such liability. The assessee who maintains his accounts on the mercantile basis would be entitled to a deduction in respect of bonus in the year in which liability arises under the statute, or the employees' claim for bonus is admitted by the assessee or is settled by an agreement between the parties or is adjudicated upon by an award. Under section 36(1)(ii) of the Income-tax Act, 1961, payment of bonus to the employees is an allowable deduction. Under the Payment of Bonus Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by its aforesaid act and conduct has declared that there is no liability in respect of that portion of the bonus not claimed by the employees. The persons who are entitled to claim such bonus, by not claiming it for years together, should be deemed to have abandoned their claims, if any. It is difficult to appreciate that when the bonus is paid annually, why such bonus, unless there is a dispute, should remain unclaimed by the concerned employees. The principle that a statute of limitation bars only the remedy but does not extinguish the debt may not strictly apply in income-tax proceedings in deciding whether there has been cessation or remission of a statutory liability. When the assessee claims a statutory liability as a deduction on " due basis ", such deduction is allowed in computing its total income even though such liability was not actually paid. This benefit is given to the assessee only because of the provisions of the Income-tax Act. Therefore, when the unclaimed bonus is no longer shown as a liability and the amount representing such unclaimed bonus is transferred to the profit and loss account, it cannot be said that there has been no remission or cessation of liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X
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