Managing director's withdrawn salary ruled taxable despite later resolution

The High Court held that the withdrawn salary amounts by the managing director of a company were taxable income, despite a later resolution asking him to forgo remuneration until profits were made. The Court emphasized that once income is received, even if surrendered later, it remains taxable. The individual's consistent withdrawals, use for personal expenses, and disclosure in tax returns indicated ownership of the income. The Court noted the company's tacit approval of the withdrawals, ruling in favor of the revenue that the salary amounts had accrued to the individual and were taxable.

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Issues:
Assessment of salary income for assessment years 1961-62 and 1962-63; Legality of salary withdrawals by the managing director; Treatment of salary amounts surrendered back to the company; Interpretation of company resolutions regarding salary payments.

Analysis:
The case involved the assessment of salary income for an individual, the managing director of a closely held company, for the years 1961-62 and 1962-63. The individual had been appointed as managing director with a resolution stating that the question of his remuneration would be determined later. Despite no formal resolution fixing the salary, the individual started withdrawing Rs. 2,000 per month from May 1960, which was recorded in the company's accounts. The individual disclosed these amounts in his tax returns initially but later excluded them after a resolution in July 1962 asked him to forgo remuneration until the company made profits.

The Income Tax Officer (ITO) treated the withdrawn salary amounts as part of the individual's assessable income, stating that the subsequent surrender could not negate the earlier accrual and receipt of income. The Appellate Authority upheld this decision, emphasizing the contemporaneous recording of salary payments in the company and individual's accounts. However, the Appellate Tribunal reversed these decisions, stating that the withdrawals did not create an enforceable right in the individual's favor.

The Tribunal referred two questions to the High Court regarding the inclusion of the salary amounts in the individual's total income. The revenue argued that the individual was entitled to the salary based on the company's conduct and resolutions, while the individual contended that without a formal resolution determining the salary, there was no accrual or receipt of income. The High Court observed that the individual had consistently withdrawn the salary, utilized it for personal expenses, and disclosed it in tax returns, indicating ownership of the income.

Citing precedent cases, the High Court held that once income is received, even if later surrendered, it remains taxable. The subsequent resolution attempting to justify the withdrawal of salary was deemed an afterthought. The Court noted the tacit approval of the company's directors and shareholders in the salary withdrawals, despite no formal resolution sanctioning the payments. Ultimately, the Court ruled in favor of the revenue, affirming that the salary amounts had accrued to the individual and were taxable income.

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