1987 (5) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 1,63,160 claimed by the assessee as a reduction in sales could be allowed in the assessment year 1972-73.
2. Determination of whether the sum of Rs. 1,63,160 constituted income accrued to the assessee under the mercantile system of accounting.
3. The relevance of the dispute between the assessee and the purchaser regarding the rate of fire-bricks on the accrual of income.
4. The applicability of the concept of real income and the actuality of the situation to the case.

Issue-wise Detailed Analysis:

1. Whether the sum of Rs. 1,63,160 claimed by the assessee as a reduction in sales could be allowed in the assessment year 1972-73:
The Tribunal held that the sum of Rs. 1,63,160 could not be allowed as a reduction in sales for the assessment year 1972-73. The assessee supplied fire-bricks worth Rs. 8,80,945 but deducted Rs. 1,63,160 due to a dispute with the purchaser. The Tribunal noted that the assessee treated this amount as a bad debt while simultaneously pursuing a money suit for its recovery. The Tribunal found no material evidence of any objection raised by the purchaser during the relevant accounting period and concluded that the sum had accrued to the assessee during the assessment year.

2. Determination of whether the sum of Rs. 1,63,160 constituted income accrued to the assessee under the mercantile system of accounting:
Under the mercantile system, income is recognized when it becomes legally due, regardless of actual receipt. The Tribunal and the High Court emphasized that the assessee's right to receive the sum of Rs. 1,63,160 accrued when the fire-bricks were supplied, as there was no objection from the purchaser at the time of delivery. The High Court referenced several precedents, including CIT v. A. Krishnaswami Mudaliar and Morvi Industries Ltd. v. CIT, to support the view that income accrues when the right to receive it arises, not when it is actually received.

3. The relevance of the dispute between the assessee and the purchaser regarding the rate of fire-bricks on the accrual of income:
The High Court held that the dispute over the rate of fire-bricks did not affect the accrual of income. The assessee's institution of a money suit for recovery indicated that the sum was considered due. The Court distinguished the present case from CIT v. Nadiad Electric Supply Co. Ltd., where the claim was deemed a "mere claim" due to a High Court ruling. In the present case, the absence of a final adjudication on the dispute meant the sum had accrued to the assessee.

4. The applicability of the concept of real income and the actuality of the situation to the case:
The High Court applied the concept of real income, emphasizing that the actuality of the situation must be considered. The Court cited State Bank of Travancore v. CIT, where it was held that income accrues when it becomes due, and mere improbability of recovery does not negate accrual. The conduct of the assessee in treating the sum as income and pursuing its recovery was material evidence of accrual. The Court rejected the assessee's argument that a disputed claim does not constitute accrued income, stating that the proposition was too broad and not supported by the facts of the case.

Conclusion:
The High Court concluded that the sum of Rs. 1,63,160 had accrued to the assessee during the assessment year 1972-73 and was taxable. The Tribunal's decision to disallow the reduction in sales was upheld, and the reference was answered in favor of the Revenue. The assessee was ordered to pay costs of Rs. 500 to the Revenue.