THE COMMISSIONER OF INCOME TAXversusSARDAR ARJUN SINGH AHLUWALIA (DEAD)THROUGH LRS. ETC.

                   THE COMMISSIONER OF INCOME TAX                                      A
                                  v.
                 SARDAR ARJUN SINGH AHLUWALIA (DEAD)
                          THROUGH LRS. ETC.

                                 OCTOBER 26, l 999
                                                                                       B
      [S.P. BHARUCHA, M. JAGANNADHA RAO AND V.N. KHARE, JJ.]


           Income Tax Act, 1961-Section 15(a); (c)-Salary-Amount due in
     previous years relevant to assessment years 1946-47 and 1947-48 received
     during previous years relevant to assessment years 1966-67 and 1967-68-           C
     Held, amount is arrears of salary taxable in assessment years 1966-67 and
     1967-68.
..         Respondent -assessee had to receive certain amounts from a party in
     the erstwhile Holkar State as per agreement entered into in January 1946.         D
     There were disputes and the assessee did not receive the amounts due. The
     amounts pertained to the previous years relevant to assessment years 1946-
     47 and 1947-48. The assessee filed a suit before the trial court and obtained
     a decree in December 1965. The amounts were received in parts by the
     assessee during the previous years relevant to assessment years 1966-67
     and 1967-68. Income Tax Tribunal held that there was master-servant               E
     relationship between the assessee and the party and that the amount was
     exigible to tax under the head 'salary'. High Court while held in favour of the
     Revenue that the income of the assessee is liable to be assessed in the
     assessment years 1966-67 and 1967-68 and not in the assessment years 1946-
     47 and 1947-48 as contended by the assessee. However, it held that the income,
     though received pursuant to the decree in December 1965, had accrued to           F
     the assessee in the assessment years 1946-47 and 1947-48 itself. Hence these
     cross-appeals by the Revenue and the assessee.

           The assessee contended that the amounts were chargeable to tax under
     section 15(a) of the Act in the assessment years 1946-47 and 1947-48 when         G
     they became due; that the amounts received cannot be termed as 'arrears of
r    salary' under section 15(c) of the Act. The assessee further contended that
     the Income Tax Act did not extend to the erswhile Holkar State, where the
     amounts were earned by the assessee in the previous years relevant to
     assessment years 1946-47 and 1947-48.
                                           135
                                                                                       H
      136                     SUPREME COURT REPORTS (1999] SUPP. 4 S.C.R.

A          Revenue contended that since the amounts were not charged to tax in
     the assessment yean 1946"47 and 1947-48, they became liable in the years
     when the! asse5see received the amounts.

            Allowing the appeal of the Revenue, the Court

B           HELD : 1. Section 15 of the Income Tax Act 1961 JDUSt be harmoniously
      read. It is clear that the amounts of salary that were payable by the party to
      the assessee in the previous year relevant to the assessment yeal!'s 1946-47
     and 1947-48 could have been brought to tax in those assessment years,
      whether paid or not The amounts were not chargeable to tax in those yean.
C    The amounts were paid to the assessee only in the previous yean relevant to       ,-
     the assessment years 1966-67 and 1967-68. There is no justification for
     holding that the amounts were not arrean of salary. The amounts were due
     by the party to the assessee for !he earlier period and they were not paid;
     they were, therefore, arrears ofsalary. Section lS(c) of the Act applies to
     such arrean of salary provided such arrean had not been charged to income
D    tax for any earlier previous year. The amounts were not charged to income
     tax for any previous year prior to the assessment year 1966-67. Therefore
     the amounts do fall within the net created by Section lS(c) of the Act, which



                                                                                       -
     is intended to catch such salary as has escaped the charge of income tax in
     earlier yean. (139-B-C-D)

E·       2. Thus, it is not possible to accept the contention of the assessee that
   Section lS(c) would apply only to arrean ofsalary which could have been
 · charged but were not charged, and since it was earned while he was in the
   entwhile Holkar State where Income Tax Act did not extend. The words used
   in section lS(c) are 'if not charged to income tax', which are wide enough to
F cover cases where the charge could or could not have been imposed.
                                                                        (139-F-G)

          CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1206-07of
     1982 Etc.

G         From the Judgment and order dated 25.4.80 of the Madhya Pradesh
     High Court in M.C.C. No. 146 of 1976.

          Dr. V. Gauri Shankar, K.N. Shukla, S.Wasim, A. Qadri, S.K. Dwivedi,
     Anil K. Shanna, S.K. Gambhir, Vivek Gambhir and M.M. Kashyap for the
     appearing parties.
H
      C.I.T. v. SARDARARJUN SINGH AHLUWALIA [S.P. BHARUCHA,J.)                137
      The Judgment of the Court was delivered by                                     A
     S.P. BHARUCHA, J. The questions that were the subject matter of the
impugned order of the High Court read thus:

        "(I) Whether on the facts and in the circumstances, the tribunal is
        justified in law in holding that the income of assessee become liable        B
        t<? 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-         C
        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 income of
        the assessee which had accruded to him in the years 1946-47 and
        1947-48?"

      There was a difference of opinion between the two learned Judges who           D
heard the reference under Section 256( 1) of the Income Tax Act, 1961. One
learned Judge answered both questions in favour of the revenue and the
other learned judge answered both questions in favour of the assessee. By
reason of the difference of opinion, the reference was then heard by a third
learned judge, the then Chief justice. He answered the first question in favour      E
of the Revenue and the second question in favour of the assessee. This has
given rise to cross appeals by the Revenue and the assessee.

      It is common ground that the question that should be addressed, and
should have been addressed, is only question no. I, the answer to question
no. 2 being merely consequential upon the answer to question no. I.                  F
      Briefly stated, the facts are:

       In January 1946 the late assessee, Arjun Singh Ahluwalia, entered into
an agreement in the name of Mis. Ahluwalia & Sons with Kalyanmal Mills
Ltd., Indore to sell to merchants all kinds of waste cotton of different qualities   G
and quantities produced by the Mills on the terms and conditions that were
contained in the letter of the Managing Director of the Mills dated 2nd
January, 1946. There were disputes between the parties and the agreement
was terminated on 9th November, 1948. The amounts due to the assessee not
having been paid, he filed a suit and the trial court passed a preliminary
decree for taking accounts. The same was upheld, with minor modifications,           H
    138                      SUPREME COURT REPORTS (1999] SUPP. 4 S.C.R.

A by the High Court. Accounts having been taken, a final decree was passed
    on 14th December, 1965. Pursuant thereto, the assessee was paid Rs. I 0,000
    between I st April, 1965 and 30th March, 1966 and Rs. 65, 532 between I st
    April, 1966 and 31th March, 1967. These amounts were brought to tax in the
    hands of the assessee for the Assessment Years 1966-67 and 1967-68
B . respectively. The Income Tax authorities and then the Tribunal held that the
    relationship between the Mills and the assessee was that of master and
    servant and that the said amounts that had been paid to him were taxable
    under the head of "salary''. Arising out of the order of the Tribunal, the two
    questions afore-mentioned were placed before the High Court for consideration.

C         That the relationship between the Mills and the assessee was that of
    master and servant and that the said amounts had been received by the
    assessee as salary is not in dispute. The question really is whether clause (a)
    of Section 15 of the Income Tax Act, 1961, applies, as contended by learned
    counsel on behalf of the assessee, or clause (c) thereof, as contended by the
    revenue. Section 15, as it then stood, reads thus:
D
            "15. The following 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;
E
            (b) any salary paid or allowed to him in the previous year by or on
            behalf of an employer or a former employer though not due or before
            it became due to him;

            (c) any arrears of salary paid or allowed to him in the previous year
p           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 in included in the total income of
           any person for any previous year it shall not be included again in the
G          total income of the person when the salary becomes due."

          According to learned counsel for the assessee, the salary or remuneration
    was due from the Mills to the assessee in the previous years relevant to the
    Assessment Years 1946-47 and 1947-48 and they were, by reason of the said
    clause (a), chargeable to tax in those assessment years, whethc:r paid or not.
H   It is his submission also that the said amounts received by the assessee
      C.I.T. v. SARDARARJUN SINGH AHLUWALIA [S.P. BHARUCHA,J.]              139
cannot be tenned "arrears of salary'', so that clause (c) has no appiication.      A
According to learned counsel for the Revenue, on the other hand, the said
amounts not having been charged to tax in the Assessment Years 1946-47 and
1947-48, they became liable to tax in the years in which they were paid to the
assessee by the Mills.

       Section 15 must be read hannoniously. It is clear that the amounts of       B
salary that were payable by the Mills to the assessee in the previous years
relevant to the Assessment Years 1946-47 and 1947-48 could haven been
brought to tax in those assessment years, whether paid or not. The point is
that they were not made chargeable to tax in those years. The said amounts
were paid to the assessee only in the previous years relevant to the Assessment    C
Years 1966-67 and 1967-68. The question is whether they are caught by the
net created by the said clause (c). We do not see any justification for holding
that these amounts are not arrears of salary. They were due by the Mills to
the assessee for an earlier period and they were not paid; they were, therefore,
arrears of salary. Clause (c) applies to such arrears of salary provided such
arrears had not been charged to income tax for any earlier previous year.          D
The said amounts, admittedly, were not charged to income tax for any
previous year prior to the Assessment Year 1966-67. In our view, therefore,
the amounts do fall within the net created by the said clause (c), which is,
broadly put, intended to catch such salary as has escaped the charge of
income tax in earlier years.
                                                                                   E
       Learned counsel for the assessee also contended that the Income Tax
Act did not extend to the Holkar State, within, which the said salary or
remuneration had been earned by the assessee from the Mills, in the previous
years relevant to the Assessment Years 1946-47 and 1947-48 and, therefore,
the said amounts could not have been charged to income tax in those                F
previous years. In his submission, the said clause (c) would apply only to
arrears of salary which could have been charged but were not charged. We
do not find it possible to accept the argument. The words used in clause
(c) are "if not charged to income tax'', and appear to us to be wide enough
to cover cases where the charge could or could not have been imposed.              G

     In the result, we answer the first question in the affinnative and in
favour of the Revenue. No answer to the second question is required.

     The appeals filed by the assessee (C.A. Nos. 1508-09/82) are, therefore,
                                                                                   H
    140                     SUPREME COURT REPORTS [1999) SUPP. 4 S.C.R.

A dismissed.
           Tue appeals filed by the Revenue (C.A. Nos. 1206-07/82) relate only to
    the answer against it on the second question and they do not require
    consideration. Those appeals are, therefore, disposed of. No order as to
    costs.
B
    B.S.                                                   Appeals disposed of.