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Kohinoor Mills Co. Ltd. v. Commissioner Of Income-Tax, Bombay City I.
Summary of Opinion by Y.S. Tambe, A.C.J.
Factual and Procedural Background
The assessee was a limited company manufacturing textile piece-goods and employed a large number of labourers and workmen. Wages due to certain labourers and workmen were not paid because some of them did not turn up to receive the amounts. The company's practice had been to add to profits, after three years, amounts of wages remaining unclaimed. For the accounting year 1955 (assessment year 1956–57) unclaimed wages totaling Rs. 30,190 were added to the assessee's income by the income-tax authorities on the ground that the trading liability had ceased by the expiry of three years under section 10(2A) of the Act. The assessee objected, contending that although the remedy to recover the wages might be barred by limitation, the liability itself had not ceased. The Tribunal held that the trading liability had ceased and sustained the inclusion. A reference under section 66(i) posed the question whether, on the facts and circumstances, there was a cessation of the trading liability within the meaning of section 10(2A).
Legal Issues Presented
- Whether, on the facts and circumstances of the case, there was a cessation of the trading liability within the meaning of section 10(2A) of the Act (i.e., whether unclaimed wages of Rs. 30,190 that arose in 1952 had ceased to be the assessee's trading liability in 1955 by reason of expiry of three years).
Arguments of the Parties
Revenue / Income-tax Authorities
- Included the Rs. 30,190 in the assessee's income for 1956–57 under section 10(2A) on the ground that the trading liability had ceased by reason of the expiry of a period of three years.
Assessee
- Contended that the trading liability had not ceased; at best the remedy to recover the unpaid wages might have become barred by limitation, but the debt/liability itself continued.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Bombay Dyeing & Manufacturing Co. Ltd. v. State of Bombay [1958] S.C.R 1122 | That "a debt subsists notwithstanding that its recovery is barred by limitation." | The court relied on this principle to conclude that the unpaid wages (a debt) continued to subsist despite the expiry of the three-year period; therefore the trading liability had not ceased within the meaning of section 10(2A). |
Court's Reasoning and Analysis
The court proceeded from the undisputed legal proposition in section 10(2A) that the income-tax authorities may include in the assessee's income any trading liability which has ceased in the relevant accounting year. The decisive question was whether the unclaimed wages of Rs. 30,190 (incurred in 1952) had ceased to be a trading liability in 1955 by reason of the expiry of three years.
The court examined authoritative precedent, specifically the observation in Bombay Dyeing & Manufacturing Co. Ltd. v. State of Bombay that "a debt subsists notwithstanding that its recovery is barred by limitation." Applying that legal principle, the court found it not possible to sustain the Tribunal's conclusion that the liability had ceased merely because the statutory period for suit had expired. In short, the bar of limitation on enforcement did not equate to extinction of the underlying debt or trading liability.
Holding and Implications
Holding: The court answered the referred question in the negative — there was no cessation of the trading liability within the meaning of section 10(2A) in respect of the Rs. 30,190.
Implications:
- The court held that, applying the cited Supreme Court authority, the unpaid wages remained a subsisting debt despite any bar to legal enforcement by limitation; accordingly the view of the Tribunal that the liability had ceased was not sustained.
- No order was made as to costs.
- The opinion does not state any broader orders or set out additional directions beyond answering the reference in the negative; no new legal principle distinct from the cited precedent was created by this opinion.
Y.S Tambe, A.C.J:— The question referred to us in this reference under section 66(i) is in the following terms:
“Whether, on the facts and circumstances of the case, was there a cessation of the trading liability within the meaning of section 10(2A) of the Act?”
2. The question arises in the following manner: The assessee, a limited company, carried on business as a manufacturer of textile piece-goods at all material times. A large number of labourers and workmen had been employed by the company for the purpose of its business. In certain years, however, certain wages due to the labourers and workmen were not paid to them because some of them did not turn up to receive them. Previously it was the practice that such amounts of wages which remained unclaimed for a period of three years were added back to the profits of the assessee after the expiry of three years. We are here concerned with the assessment year 1956-57, the relevant accounting year being the calendar year 1955. It appears that the amount of wages which had become due to the labourers and workmen, but which were not claimed by them, amounted to Rs. 30,190. The income-tax authorities added that amount of Rs. 30,190 in the income of the relevant assessment year on the ground that the liability to pay the amount to labourers and workmen had ceased by reason of the expiry of the period of three years. The claim of the income-tax authorities was founded on section 10(2A) of the Act. The assessee objected to the inclusion of the said amount in its income. According to the assessee, the liability did not cease though the remedy to recover the amount of wages by the labourers and workmen may have become barred. The Tribunal did not accept this contention of the assessee; but, on the other hand, held that in the hands of the assessee the trading liability in respect of unclaimed wages could not be enforced by the workmen and as such there was a cessation of the trading liability within the meaning of section 10(2A) of the Act.
3. It is not in dispute before us that in view of the provisions of section 10(2a), it is open to the income-tax authorities to include in the income of the assessee the amount of the trading liability of the assessee, which had ceased to be its trading liability in the relevant accounting year. The question, however, is whether the trading liability to the extent of Rs. 30,190 representing the unclaimed wages, which was the trading liability of the assessee incurred in the year 1952 had ceased to be its trading liability in the year 1955 by reason of the expiry of three years, and thus barring the remedy of the labourers and workmen to recover that amount by way of suits. The answer to this question has been given by their Lordships of the Supreme Court in Bombay Dyeing & Manufacturing Co. Ltd. v. State of Bombay [1958] S.C.R 1122.. At page 1135, their Lordships observed:
“The position then is that, under the law, a debt subsists notwithstanding that its recovery is barred by limitation….”
4. That being the principle 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.
5. We therefore answer the question referred to us in the negative. We make no order as to costs.
6. Question answered in the negative.
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