1. Supply of goods under contract — subsequent receipt of compensation for losses — dispute over the assessment year for taxability under the Income-tax Act. (Para 2 )
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1964 Supreme(SC) 139
SUPREME COURT OF INDIA
J.C.Shah : K.Subba Rao : S.M.Sikri
Commissioner Of Income Tax, Madras
Versus
A.Gajapathy Naidu, Madras
Case No. : 617 of 1963
Date of Decision : 4/16/64
Advocates Appeared: Chaudhuri K.R. : Chaudhuri K.Rajendra : Sachthey R.N. : Singh Gopal
Advocates:
Gopal Singh, K.R.CHAUDHARY, K.RAJENDRA CHAUDHARY, R.N.SACH
Gopal Singh, K.R.CHAUDHARY, K.RAJENDRA CHAUDHARY, R.N.SACH
Income under the mercantile system accrues when the assessee acquires a legal right to receive it. It cannot be related back to a previous year's transaction if no legal right to that specific amount existed during that earlier period.
Headnote:(A) Indian Income-tax Act, 1922 - Section 4(1)(b)(i) - Income accruing or arising - Mercantile system of accounting - Assessment year - Income accrues or arises when the assessee acquires a legal right to receive the same; it represents a stage anterior to the point when income becomes receivable (Paras 7 and 8).
(B) Interpretation of Statutes - Application of foreign decisions - The Indian Income-tax Act is not in pari materia with British income-tax statutes; while English authorities may be useful guides on fundamental concepts and general principles, the Indian statute must be construed on its own terms without drawing analogies from foreign statutes that differ in wording or legal context (Para 6).
(C) Mercantile System of Accountancy - Under this system, income is credited when it becomes legally due, regardless of actual receipt - No provision exists under the Act to relate back income that accrued in a subsequent year to an earlier year solely on the ground that the income arose out of an earlier transaction - The question of reopening accounts is irrelevant in determining when a legal right to receive an amount accrued (Para 8).
Facts of the case:
A supplier of provisions to a government hospital entered into a contract for the supply of bread. The supplier maintained accounts on a mercantile basis. After the contract period ended and accounts were closed, the government issued an order directing the payment of compensation for losses sustained by the supplier during the contract year. The supplier received this payment in a subsequent accounting year. The tax authorities included this sum in the assessment for the year of receipt, whereas the assessee argued that the amount should be related back to the year of the original contract.
Findings of Court:
The compensation amount was not assessable in the year of the original contract because the supplier had no legal right to that specific sum at that time. The right to receive the payment only came into existence when the government order was passed in a later year.
Issues: Whether a sum received as compensation for losses sustained in a previous contract year, but granted by a subsequent government order, should be assessed in the year the legal right to receive it accrued or related back to the year of the original transaction.
Ratio Decidendi: Income "accrues" or "arises" only when the assessee acquires a legal right to receive it. Under the mercantile system, the date of legal entitlement is the determining factor for assessment. The Indian Income-tax Act does not permit the reopening of closed accounts to attribute income to a previous year simply because the payment is correlated to an earlier commercial transaction, and foreign legal principles allowing such a practice are not applicable to the Indian statute.
Result: Appeal allowed.
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2. Revenue contends income is taxable in the year of accrual; assessee argues it should relate back to the year of the original transaction. (Para 5 )
3. Indian Income-tax Act is not pari materia with English statutes; income accrues when a legal right to receive it is acquired. (Para 6 , 7 , 8 , 9 )
4. Income accrues when the assessee acquires a legal right to receive it; no provision exists to relate back income to an earlier transaction year. (Para 8 )
5. Appeal allowed — High Court order set aside — sum held assessable in the year it accrued. (Para 10 )
6. When does income accrue or arise under the Indian Income-tax Act?
Income accrues or arises when the assessee acquires a legal right to receive the amount. This represents a stage anterior to the point when the income becomes receivable and denotes an inchoate character. (Para 7 , 8 )
7. Can income received in a later year be related back to an earlier transaction year for tax purposes?
No. Under the Indian Income-tax Act, there is no provision to relate back income that accrued in a subsequent year to an earlier year simply because it arose from an earlier transaction. (Para 8 )
8. To what extent are English tax decisions applicable to the interpretation of the Indian Income-tax Act?
English decisions are not binding as the Indian Act is not pari materia with British statutes. They may only serve as guides for fundamental concepts or general principles unaffected by specific English statutory peculiarities. (Para 6 )
9. How does the mercantile system of accountancy affect the timing of income accrual?
The mercantile system brings into credit what is legally due immediately it becomes legally due, regardless of when it is actually received. Tax assessment is based on these book profits. (Para 8 )
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 court he
