1967 (1) TMI 19 - HC - Income Tax

Assessee received payment of Rs. 32, 218 in the relevant previous year on account of difference in rates in respect of goods supplied during the war years - Where a receipt is correlated to and arises out of commercial transactions between the parties the receipt related back to the year of account when the transaction took place irrespective of the year when the money was received

Summary

Issues:
Assessment of a sum received by the assessee in the assessment year 1957-58 for goods supplied during the war years; Whether the sum of Rs. 32,218 is assessable to tax in the relevant assessment year.

Analysis:
The case involved a registered firm dealing in iron goods and running a steel rolling mill. The firm received a sum of Rs. 32,218 from the Government due to a difference in the price of goods supplied during the war years. The firm contended that the receipt was not business income and should not be assessed in the year of receipt. However, the department disagreed, relying on previous tribunal decisions for similar payments in other assessment years. The firm argued that the amount should be taxed on an accrual basis during the war years when the goods were supplied, citing a Madras High Court decision. Nonetheless, the Supreme Court had overruled the Madras High Court decision, stating that the right to receive payment arises when the compensation is quantified, not when the transaction occurs.

The firm further claimed that a letter from the Iron and Steel Controller constituted a contract, and the right to compensation accrued when each supply was made. However, the court rejected this argument, stating that the letter was merely an assurance and did not create a contract. Income only accrues when a person has a right to receive it, which was not the case during the war years in this situation. The court also distinguished a previous case involving a managing agent's commission, where the firm followed the mercantile method of accounting, unlike the present case.

Ultimately, the court held that the firm's claim was not valid, as there was no debt created in its favor during the war years, and the right to receive payment only arose when the compensation was quantified. Therefore, the sum of Rs. 32,218 was deemed assessable to tax in the relevant assessment year, and the court ruled in favor of the department, ordering the firm to pay the costs of the reference.