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PUNJAB & HARYANA HIGH COURT
M.M.Punchhi, J.
Dewan Gian Chand
Versus
Commissioner Of Income-tax
Civil Writ No. 2546 of 1973,2547 of 1973,
Decided On : DECEMBER 8, 1981
INCOME TAX - Accrual of income - Resolution passed by company to forgo income of directors for period ending March 31, 1958 - Resolution also sanctioned actual expenditure incurred by directors for running their individual trucks to be charged as expenses from company up till March 31, 1958 - Whether resolution was prospective in operation and by conduct of parties was treated to be such - Whether resolution was collusive - Whether there was any fresh agreement or resolution to the contrary replacing the original agreement executed between the parties on September 13, 1956.
Fact of the Case:
The petitioners, directors of a company, passed a resolution on April 30, 1958, to forgo their income from the company for the period ending March 31, 1958. The resolution also sanctioned the actual expenditure incurred by the directors for running their individual trucks to be charged as expenses from the company up till March 31, 1958. The petitioners did not include the accrued income in their income tax returns for the assessment year 1959-60. The Income Tax Officer (ITO) added the accrued income to the petitioners' income and the additions were affirmed by the Appellate Assistant Commissioner (AAC) and the Commissioner. The petitioners filed writ petitions in the High Court, which allowed the petitions and quashed the orders of the Commissioner. The Commissioner passed fresh orders rejecting the revision petitions filed by the petitioners.
Finding of the Court:
The High Court held that the resolution was prospective in operation and by conduct of parties was treated to be such. The court also held that there was no basis for the finding of the Commissioner that the resolution was collusive. The court further held that there was no fresh agreement or resolution to the contrary replacing the original agreement executed between the parties on September 13, 1956.
Issues: 1. Whether the resolution passed by the company was prospective in operation and by conduct of parties was treated to be such? 2. Whether the resolution was collusive? 3. Whether there was any fresh agreement or resolution to the contrary replacing the original agreement executed between the parties on September 13, 1956?
Ratio Decidendi: 1. The High Court held that the resolution was prospective in operation and by conduct of parties was treated to be such because: (a) The first and third paragraphs of the resolution undoubtedly pertained to the period ending March 31, 1958, wherein the benefits already accrued to the directors heretofore and therein mentioned were forgone but simultaneously a compensatory measure was adopted in sanctioning the actual expenditure incurred by the directors for running their individual trucks to be charged by them as expenses from the company up till March 31, 1958; (b) In the second paragraph, out of the directors so mentioned, one of them had reduced the remuneration from Rs. 2,000 per mensem to Rs. 1,000 whereas the remaining two had forgone the income of their respective trucks altogether. It obviously means that even the director who had forgone the entire accrued income for the period ending March 31, 1958, had in future only forgone half of it and not the full, whereas the remaining directors had, for future, forgone the entire. 2. The High Court held that there was no basis for the finding of the Commissioner that the resolution was collusive because no facts were forthcoming from the orders of the officers of the Revenue to suggest that the resolution was an act of fraud or deceit. 3. The High Court held that there was no fresh agreement or resolution to the contrary replacing the original agreement executed between the parties on September 13, 1956, because the petitioners had respectively agreed to accept Rs. 2,000 per mensem as hire charges of the truck without any collusiveness involved in it, and in the same manner could forego the accruing income well in hand without any collusiveness involved in it.
Final Decision: The High Court allowed the writ petitions and quashed the impugned orders of the Commissioner.
M.M.Punchhi, J.
1. This judgment will dispose of Civil Writ Petitions Nos. 2546 and 2547 of 1973, as facts giving rise thereto are similar and can conveniently be depicted as one set.
2. Dewan Gian Chand and Dewan Surinder Kumar, the respective petitioners, were directors of Krishna Roller Flour Mills Private Ltd. (hereinafter called "the company") up to 31st March, 1959, on which date the said company went into voluntary liquidation. Both the petitioners owned a truck each which they had given to the said company on hire and the hire charges were Rs. 2,000 per month. It stands undisputed that the period of month is to be computed from the first of every calendar month ending on the last day of the month. After the period ending 31st March, 1958, the company in one of its meetings passed a resolution on 30th April, 1958, which may with benefit be reproduced below :
"1.Resolved unanimously that in consideration of the heavy loss sustained by the company for the year ended 31-3-1958, offers of the following directors for forgoing the benefits enjoyed during the said year be and are hereby accepted. Relevant entries may, therefore, be given effect to in the books of account relating to the said year on the 31st March, 1958 ; (a) Shri Dewan Raclha Kishan : Offer of acceptance of reduced remuneration of Rs. 1,000 instead of Rs. 2,000 per month, (b) Shri Dewan Gian Chand : Offer of forgoing income of his truck No. 2031 PNL as per agreement--Rs. 24,000. (c) Shri Diwan Surinder Kumar : Offer of forgoing income of his truck No. FNL 2032 as per agreement--Rs. 24,000.
2. Resolved unanimously that in view of the substantial offers made by Dewan Gian Chand and Dewan Surinder Kumar, the board of directors hereby sanction the actual expenditure done by the said directors for running their individual trucks mentioned above and the same may be charged to the expenses of the company giving effect to it under the date 31-3-1958."
3. Both the petitioners while submitting returns under the Indian I.T. Act, 1922, for the assessment year 1959-60 did not include in their income, which would otherwise have fallen due to them on accrual basis of Rs. 2,000 per mensem, for the months of April, 1958, till March, 1959. Rather their account books were totally silent about these accruals despite the fact that the petitioners were following the mercantile system of accounting. At the time of the framing of the respective assessments, their counsel was confronted by the ITO with such an omission and the said counsel readily gave in that the respective petitioners be so assessed to the accrued income subject to their right of deduction for expenses and depreciation. On that basis, two respective assessment orders were framed against the petitioners, vide annex. A. They unsuccessfully appealed before the AAC where the additions were affirmed, vide annex. B. Their respective revision petitions before the Commissioner too failed. They then approached this court under Article 226 of the Constitution since the Commissioner had not afforded any opportunity to the petitioners of being heard. Those writ petitions, being C. W. P. Nos. 3006 and 3007 of 1965, were allowed by a single judge of this court, vide annex. C quashing the orders of the Commissioner. The matters were remitted to the Commissioner for rehearing. This time, after hearing the respective petitioners, the Commissioner again rejected the revision petitions, vide orders annex. D, respectively, to both the writ petitions which are now impugned. The basis of the order is common.
4. The impugned order of the Commissioner is grounded on three facts--
(1) that the resolution aforementioned pertains only to the period ending March 31, 1958, and can have no applicability to the period ending March 31, 1959;
(2) that the resolution appears to be collusive; and
(3) that there was no fresh agreement or resolution to the contrary replacing the original agreement executed between the parties on September 13,
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