1991 (3) TMI 79 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amount credited as the price of medicine supplied to Government represents accrued income or income received.
2. Whether entries made in accounts represent mere claims.

Summary:

Issue 1: Accrued Income or Income Received
The respondent-assessee, a public sector undertaking, supplied pharmaceutical products to the Health Services Department of the Kerala Government. The Government sanctioned ad hoc advances, adjusted later against supplies, based on tentative prices. The assessee claimed Rs. 41,86,349 as excess amount receivable, which the Government rejected. The Income-tax Officer (ITO) refused to exclude this amount from total receipts, citing the mercantile system of accounting. However, the Commissioner of Income-tax (Appeals) and the Tribunal held that the claim was unilateral and did not constitute accrued income. The Tribunal relied on Supreme Court decisions in Shoorji Vallabhdas and Co. [1962] 46 ITR 144 and Gujarat High Court in Western India Engineering Co. [1971] 81 ITR 712, concluding that the price initially charged did not represent the correct price and a mere claim cannot be equated with income.

Issue 2: Entries in Accounts as Mere Claims
The Tribunal observed that the entries made in the accounts represented mere claims and not accrued income. The Supreme Court in CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 distinguished between the mercantile and cash systems of accounting, emphasizing that only real income is chargeable to tax. The Supreme Court in Shoorji Vallabhdas and Co. [1962] 46 ITR 144 held that hypothetical income not materializing cannot be taxed. The Tribunal, agreeing with the Commissioner of Income-tax (Appeals), noted that the price of drugs supplied was tentative and not fixed by contract, and the entries made were mere claims, not accrued income.

Conclusion:
The Tribunal was correct in excluding the amount of Rs. 41,86,349 from the total receipts, as it represented a mere claim and not real income. The question referred was answered in the affirmative, in favor of the assessee and against the Revenue.