The main legal point established in the judgment is the crucial distinction between the accrual and receipt of income, and the relevance of this distinction in determining the taxability of income for a non-resident company.

CHAGLA, C.J. :- The assesses company is a company registered in the Baroda State and the assessment year of this reference is 1942-43 (calendar year 1941). This company is a non-resident company. It manufactures textile goods, and after the goods are manufactured, they are sold by the company ex-mills. The company has their guaranteed brokers Messrs. Jagmohandas Ramanlal and Co., and they guarantee the payment by the merchants to the company and they receive a commission for the work which they do. The contention of the company was that the company being a non-resident company it was not liable to pay any tax on its profits or income as none of the profits made by the company had teen received in British India. In order to decide this question we have to consider separately three items which are the subject-matter of this reference, viz., (1) an item of Rs. 12,68,480, (2) an item of Rs. 4,40,878 and (3) an item of Rs. 6,71,735. Now, with regard to the first item of Rs. 12,69,480 the company debited in their boobs of account a sum of Rs. 13,41,744 to Messrs. Jagmohandas Ramanlal and Co. and credited it to the sales accounts, thereby representing that the goods covered by this amount had been sold by the company for this sum. I may mention that the company maintains its accounts on a mercantile basis and not on cash basis. Messrs. Jagmohandas Ramanlal and Co. realised from various merchants from Ahmedabad to whom goods had been sold the sum of Rs. 12,68,480 and they utilised that sum is paying off various creditors of the company at Ahmedabad. On these facts there can be no doubt that the sum of Rs. 12,68,480 was received by the assessee company in Ahmedabad. A contention was put forward by the assessee company that the company was not concerned with payments made by the merchants in Ahmedabad and that they were only concerned with Messrs. Jagmohandas Ramanlal and Co., being their guaranteed brokers. It was argued that the sum of Rs. 13,41,744 was debited to Messrs. Jagmohandas Ramanlal and Co. and the company only looked to Jagmohandas Ramanlal and Co. for the payment. It must not be forgotten that Messrs. Jagmohandas Ramanlal and Co. were merely guaranteed brokers. The primary liability to pay for the goods was upon the merchants to whom they were sold by the company. Messrs. Jagmohandas Ramanlal and Co. were mere guarantors and their guaranteeing the payment by the merchants did not in any way affect the primary liability of the merchants to pay the company. Therefore, when the merchants paid to Messrs. Jagmohandas Ramanlal and Co. they were discharging their primary liability to the company, and Messrs. Jagmohandas Ramanlal and Co. having made use of this sum of Rs. 12,68,480 according to the instructions of the company, they in law did receive this sum on behalf of their principals, the assessee company.

2. But an important contention has been raised by Mr. Kolah on behalf of the assessee company, viz., that the receipt of Rs. 12,68,480 by Messrs. Jagmohandas Ramanlal and Co. was not a receipt of the sale proceeds of the goods sold by the company but was merely realisation of the debt due by the merchants to the company. This argument is based on the fact that the company maintains its accounts on the mercantile basis and not on cash basis. It is urged that under the mercantile basis the actual receipt of money is irrelevant and has not got to be considered. Under the mercantile basis the company debits and credits various sums of money either as they become liable to pay money or become entitled to receive money and under the mercantile basis profits accrue to the company when the necessary entries are made in the books of accounts. The actual receipt of cash is irrelevant for the determination of the profits earned by a company. In contradistinction under the cash basis the amount received or expended is the basis for the determination of income and profits to the assesses who maintains accounts in that form. It i