1975 (7) TMI 39 - HC - Income Tax

Summary

Issues Involved:
1. Accrual of Income
2. Relationship of Master and Servant
3. Impact of Litigation on Income Accrual

Summary:

1. Accrual of Income:
The primary issue was whether the sum of Rs. 58,125 accrued to Shri Narottamdas Jethalal only in November 1955 when the High Court's judgment was pronounced. The Tribunal had held that the amount accrued only in November 1955, but the High Court disagreed, stating that income is taxable when it accrues, arises, or is received. The court emphasized that under the mercantile system of accounting, income is credited when it becomes legally due, not necessarily when it is received. The court concluded that the income of Rs. 15,000 per year accrued to Narottamdas at the end of each accounting year, as there was no dispute between the company and Narottamdas regarding the payment.

2. Relationship of Master and Servant:
The Tribunal had held that there was no relationship of master and servant between Narottamdas and the company, and thus, the provisions of section 7 could not apply to any remuneration paid to him. However, the High Court did not delve deeply into this issue as it focused more on the accrual of income and the impact of litigation on such accrual.

3. Impact of Litigation on Income Accrual:
The court addressed the argument that the litigation by the shareholders created a hurdle on the right of Narottamdas to claim the amount, and until this hurdle was removed by the High Court's final decision, the income could not be said to have accrued. The court rejected this argument, stating that a judgment or decree of a court does not create a right or liability but merely declares a pre-existing right or liability. The court noted that the company had accepted its liability to pay the amount, and the litigation by the shareholders did not affect the accrual of income to Narottamdas. The court also pointed out that the legal heirs of Narottamdas were paid not only the amount as per the resolution but also interest, indicating that the income had accrued annually.

Conclusion:
The High Court answered the question in the negative and against the assessee, concluding that the sum of Rs. 58,125 accrued to Narottamdas at the end of each accounting year and not only in November 1955. The assessee was ordered to pay the costs of the revenue.