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1980 Supreme(P&H) 281
PUNJAB & HARYANA HIGH COURT
Bhopinder Singh Dhillon and M.R.Sharma JJ.
Salig Ram Kanhaya Lal
Versus
Commissioner Of Income-tax
Income tax Reference No. 11 of 1976,
Decided On : AUGUST 21, 1980
The accrual of income under the mercantile system of accounting is determined by the substance of the situation and not solely by the date of the decree or the receipt of the amount.
Headnote:
INCOME TAX - Accrual of income - Mercantile system of accounting - Decretal amount received by assessee in respect of a trading transaction - Whether accrued in the year of decree or in the year of receipt - Interpretation of Section 145 of the Income Tax Act, 1961.
Fact of the Case:
The assessee, a commission agent in foodgrains, supplied wheat to the District Food and Supplies Controller and received payment in the accounting year ending March 31, 1965. The assessee claimed an extra amount through a civil suit, which was decreed in its favor on July 18, 1969, along with costs. The assessee entered the decretal amount as "suspense account (Government litigation)" in its books of account during the accounting year 1970-71. The ITO, during proceedings for the assessment year 1971-72, included the decretal amount as revenue receipt in the assessment completed on December 11, 1972. The assessee challenged this order, and the AAC allowed the appeal. The Tribunal held that the amount was taxable as the assessee's income for the assessment year 1970-71.
Finding of the Court:
The court held that the decretal amount could not have been deemed to have accrued to the assessee in the assessment year in which the decree was passed, as the State Government had filed an appeal against the decree and the accrual had gone into a state of flux. However, the court held that the question of accrual became otiose when the decretal amount reached the assessee's pocket, as the liability to pay tax would arise as soon as the amount was received.
Issues: 1. Whether the decretal amount accrued to the assessee in the year of decree or in the year of receipt? 2. Whether the assessee was liable to pay tax on the decretal amount in the assessment year 1970-71?
Ratio Decidendi: 1. The court interpreted Section 145 of the Income Tax Act, 1961, which recognizes the right of a trader to adopt either the mercantile or cash system of accounting. The court held that in peculiar business transactions that do not admit of one or the other form of accounting, the assessing authority must look at the substance of the situation and decide the matter fairly. 2. The court held that the decretal amount could not have been deemed to have accrued to the assessee in the assessment year in which the decree was passed, as the State Government had filed an appeal against the decree and the accrual had gone into a state of flux. However, the court held that the question of accrual became otiose when the decretal amount reached the assessee's pocket, as the liability to pay tax would arise as soon as the amount was received.
Final Decision: The court answered the question referred to it in Reference No. 11 of 1976 in favor of the assessee and against the revenue. The court held that the Tribunal was not right in holding that the amount under the decree accrued to the assessee on the date when the decree was passed in its favor.
M.R.Sharma, J.
1. M/s. Salig Ram Kanhaya Lal, Kotkapure, is a registered firm carrying on the business of commission agents in foodgrains. It is being described hereinafter as the assessee. During the accounting year ending March 31, 1965, the assessee has supplied some wheat to the District Food and Supplies Controller, Bhatinda, for which it received a sum of Rs. 2,72,281. In the balance-sheet for the period ending March 31, 1965, the assessee showed the cost of wheat as Rs. 2,80,911 and the amount received from the District Food and Supplies Controller was shown on the liabilities side under the account " District Food and Supplies Controller". Even though the assessee was maintaining accounts on the mercantile system of accounting, yet it did not claim any loss in the said transaction in the assessment year 1965-66. The assessee filed a civil suit in the Court of Senior Subordinate Judge, Bhatinda, claiming an extra amount of the Rs. 78,131: The suit was decreed for Rs. 78,131 on July 18, 1969, along with Rs. 4,159 as costs. The total decretal amount of Rs. 82,290 was entered by the assessee in its books of account as " suspense account (Government litigation) " during the accounting year 1970-71. This item was not entered in the books of account of the assessee during the accounting year 1969-70 relevant to the assessment year 1970-71. The assessee filed a return for the relevant assessment year on September 30, 1970, declaring its income at Rs. 46,250. The assessment was originally completed by the ITO on July 6, 1971, on a total income of Rs. 47,675. The revenue claims that the suspense account showing credit of Rs. 82,290 came to the notice of the ITO during the proceedings for the assessment year 1971-72 and, since this amount related to the earlier year, the ITO initiated proceedings under Section 147 of the I.T. Act, 1961 (hereinafter referred to as "the Act"), and issued a notice under Section 148 of the Act to the assessee on February 10, 1972. In response to this notice, the assessee filed a return reiterating its income to be Rs. 46,250 as had been shown in the earlier return. The assessee pleaded that, since the Government had filed an appeal against the judgment and decree of the learned senior sub-judge passed in its favour for Rs. 89,290, this amount was not liable to tax. The ITO did not accept this contention. He held that the assessee was maintaining its books of account on mercantile system of accounting and it became entitled to this amount when the decree was passed in its favour in July, 1969. He, therefore, treated this amount as revenue receipt and included it in the assessment completed on December 11, 1972, determining the total income at Rs. 1,29,865.
2. The assessee challenged this order of assessment in an appeal before the AAC on the ground that, since the decree had been challenged in appeal, the judgment had not become final and the decretal amount was not liable to be taxed in the year when the decree was passed. This contention prevailed with the appellate authority, who allowed the appeal filed by the assessee.
3. The ITO went in appeal before the Income-tax Appellate Tribunal, Chandigarh Bench, which was allowed. The Bench held that the taxability of an assessees income was determined by the charging section which fully applied to t,he facts of the case. Under the mercantile system of accounting the taxability of the amount was not determined by the receipt of the amount and, under that system, the amount should have been credited in the books of account on accrual basis in the year when the decree was passed in favour of the assessee.
4. At the instance of the assessee, the Income-tax Appellate Tribunal has referred the following question of law for our opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right, in law, in holding that the sum of Rs. 82,290 was taxable as the assessees income for the assessment year 1970-71 ?"
5. This dispute i
