K.SUBBA RAO, J.

(1) THIS appeal by certificate is preferred against the order of the High court of Judicature at Madras holding that a sum of Rs. 12,447.00 received by the respondent from the government during the accounting year 1950-51 was not assessable to tax for the assessment year 1951-52.

(2) GAJAPATHY Naidu, the respondent, was supplying provisions to the government Stanley Hospital. Royapuram, Madras. During the financial year April 1, 194 8/03/1949, he entered into a contract with the government for the supply of bread to the said hospital at the rate of Rs. 0-4-6 per lb. As the respondent was maintaining his accounts on mercantile basis, it is common case that the amount due from the government under the terms of the said contract was credited in the accounts of the respondent for that year. For the assessment year 1949-50 the Income-tax Officer assessed the respondent to income-tax on the basis of the accounts so made. It appears that some time after 31/03/1949, representations were made to the government for relieving the respondent from the loss sustained in the supply of bread to the hospital. The government by its order dated 24/11/1950, directed payment of compensation for the loss sustained by the respondent in respect of the supply of bread to the hospital during the year 1948-49 under the said contract. The respondent received on that account payment of Rs. 12,447.00 during the year of account 1950-51. In the assessment year 1951-52 the, income-tax Officer included the said amount in the assessment of that year. The assessee, inter alia, contended that he received the said sum in respect of the contract that was entered into by him with the government during the accounting year 1948-49 and, therefore, it could not be included in the assessment year 1951-52. This contention was rejected by the Income-tax Officer and, on appeal, by the Appellate Assistant Commissioner and also, on further appeal, by the Income-tax Appellate tribunal. But the contention received favour with the High court on a reference made to it under s. 66(1) of the Indian Income-tax Act, 1922, hereinafter called the Act. The following two questions were referred to the High court: `1. Whether the sum of Rs. 12,447.00 is assessable to income tax? ` `2. If so, whether it has been rightly assessed in the assessment year 1951-52.` On the first question the High court held that the said amount was directly related to the business of the assessee and, therefore, was taxable as a trade receipt. It answered the first question in the affirmative. No argument was raised before us on the question of the correctness of this finding. Therefore, nothing further need be said about it.

(3) THE High court answered the second question in the negative. Its conclusion is based upon the following three steps: 1. `The only right of the assessee, on the date, when he supplied the bread, was to debit the government the contract rate. He was entitled to nothing further. The government Order which raised the rates, came into existence long after payment thereunder was ex gratia, and not on the basis of a right. Therefore, the amount of Rs. 12,447.00 was not, and indeed could not have been debited in the books of the assessee for the year, when the supply of bread was made to the hospital, namely, 1948- 49. Those accounts have been closed.` 2. But where a receipt is correlated to and arises out of a commercial transaction between the parties, the right or liability should be deemed to have been established in the past accounting period. That principle is based not only on any theory of accrual, because there was no legal right existing then; but being correlated to the transaction, it L/P(D)ISCI25 should properly belong to it, and the account should be re-opened when the payment came in. 3. `Being a receipt of an earlier year, the amount could not be included in the assessment for the year 1951-52.

(4) ON the said reasoning the High cour