A GAJAPATHY NAIDU Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE following questions have been referred under section 66(1) of the Indian Income Tax Act, 1961 " 1.Whether the sum of Rs. 12, 447 is assessable to income-tax "

(2.) IF so, whether it has been rightly assessed in the assessment year 1951-52 " " The assessee owns a bakery and a provision shop and he runs also a restaurant. He also takes contracts for the supply of bread or other provisions to institutions like a hospital. The assessee's year of account ends with the financial year, namely, 31st of March. During the year of account ending with March 31, 1949 (corresponding assessment year being 1949-50), the assessee entered into a contract with the Government for the supply of bread to the Stanley Hospital, Madras, at certain rates. Those rates were, however, found to be uneconomical. Representations were made to the Government, it is said, after the close of the year for relieving the contractor from the loss sustained in the supply of bread. The Government acceded to the request and passed G.O. No. Mis. 4005, Home, dated November 24, 1950, directing payment of compensation for the loss sustained by the contractor in the supply of bread in the year 1948-49. The assessee submitted a bill on December 27, 1950, and received a payment of Rs. 12, 447 during the year of account corresponding to the year of assessment 1951-52. In the assessment of the income-tax for that year, namely, 1951-52, the Officer included the sum of Rs. 12, 447. The assessee contested the inclusion on two grounds, (1) that it was in the nature of a windfall, and (2) that it being a receipt in respect of a contract performed in the year relating to the assessment year 1949-50, it could not be included in the assessment for the year 1951-52. The contentions were overruled, and the amount was brought to tax. An appeal to the Appellate Assistant Commissioner and a further appeal to the Tribunal met with no successThe first question, which relates to the contention that the receipt was of a casual nature, presents little difficulty. The payment was, no doubt, an act of grace on the part of the Government, but it was directly related to the business of the assessee the receipt by the assessee would be one arising out of his business. The G.O. purported to increase the rate originally agreed to, and the excess on the basis of the increased rates was paid to the assessee. Further, the assessee was actually doing the same business in the year of account. The receipt will be a trade receipt, and will be liable to tax But the more important question is the next one, namely, whether that amount can be included for the assessment in the year 1951-52. The assessee maintained his accounts on the mercantile basis. Under that system, profits or gains are treated as arising or accruing on the date of the transaction, notwithstanding the fact that they are not received or deemed to be received, the book profits being taken for the purpose of assessment to tax. For ascertaining such profits, sums which were due to the business are entered on the credit side of the account immediately they are due, and before they are actually received. Similarly, the expenses are entered the moment the legal liability to pay arises, and before the actual disbursement. The income made, therefore, accrues to an assessed under that system without its actual receipt, because, it can be said to accrue, to him once the assessee acquires a right to receive it, though it may be received later. In Sassoon & Co. Ltd. v. Commissioner of Income-tax, the Supreme Court, considering the scope of an accrued income, observed at page 51 " It is clear, therefore, that income may accrue to an assessee without the actual receipt of the same. IF the assessee acquires a right to receive the income, the income can be said to have accrued to him, though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti solvendum in futuro . . Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him." *

(3.) AS the illustrative cases mentioned by the learned author would show, the right or liability, the existence of which in the past is a prerequisite for the jurisdiction to reopen, may be one which exists or is deemed to have existed. A simple case is one, in which a receipt can be added to the profit and loss account of the past period, if title to that sum arose in that period, notwithstanding the fact that the precise amount was not ascertained till a later period In Commissioners of Inland Revenue v. Newcastle Breweries Ltd. the assessee carried on the business of brewers and wine, and in the course of their business, kept large stocks of rum which was reduced and blended before sale. A portion of the assessee's stock of rum was requisitioned by the Admiralty in January, 1918, and payment therefor at a specified rate was accepted by the company without prejudice to a claim for a larger payment. Litigation followed in regard to the actual amount due, and pending the litigation, legislation was passed, providing for a method of compensation in similar cases. The amount due was so ascertained. In November, 1921, a sum of money was paid to the assessee, in addition to what was paid originally towards the price of the rum requisitioned by the Government. It was held that the receipt in question must be included for excess profits duty for the accounting period ending on October 30, 1918, in which the rum was taken over, as it was attributable to the requisition in that year, though the amount was ascertained later. Warrington, L.J., observed at page 948 thus " Treating the transaction, as I think we ought to do, as a commercial transaction, the property in the goods passed by delivery during the accounting period and the money then became payable, although, owing to a dispute as to the amount, it was not ascertained or paid in full until some years later, and if this be so then the whole amount, and not merely that part of it which was paid on account, would, in my opinion, be properly dealt with in ascertaining the profits for the accounting period." *