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Dhrangadhra Chemical Works Ltd. Vs. Commissioner of Income-tax, Bombay City Ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 56 of 1966
Judge
Reported in[1977]106ITR473(Bom)
ActsIncome Tax Act, 1922 - Sections 4(3)
AppellantDhrangadhra Chemical Works Ltd.
RespondentCommissioner of Income-tax, Bombay City Ii
Appellant AdvocateR.J. Kolah, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
(i) direct taxation - grant of subsidy - section 4 (3) of income tax act, 1922 - sole object underlying grant of subsidy was to enable assessee-company to carry its business profitably - this was to ascertain that assessee might not suffer losses having regard to prices at which imported soda ash could be sold in country even after protective duty was imposed thereon - even though subsidy is payable for limited duration it cannot be regarded as casual or non-recurring receipt. (ii) taxable amount - section 80 of code of civil procedure, 1908 and section 4 (3) (vii) of income tax act, 1922 - until government was satisfied regarding fair selling price at which soda ash sold it was not obliged to pay subsidy - amount claimed not paid notwithstanding demand and statutory notice under section.....kantawala, c.j.1. at the instance of the assessee the following three questions are referred to us for our determination : '1. whether, on the facts and in the circumstances of the case, the tribunal was right in law in holding that the sum of rs. 12,790.30 incurred by the assessee in obtaining and securing loans from the industrial finance corporation was not allowable under the provisions of section 10(2)(xv) of indian income-tax act, 1922 2. whether, on the facts and in the circumstances of the case, the sum of rs. 2,03,903 was exempt under section 4(3)(vii) of the india income-tax act, 1922 3. if the answer to question no. 2 is in the negative, whether the said sum of rs. 2,03,903 was liable to be taxed in the assessment year 1955-56 as held by the tribunal so far as the first.....
Judgment:

Kantawala, C.J.

1. At the instance of the assessee the following three questions are referred to us for our determination :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 12,790.30 incurred by the assessee in obtaining and securing loans from the Industrial Finance Corporation was not allowable under the provisions of section 10(2)(xv) of Indian Income-tax Act, 1922

2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,03,903 was exempt under section 4(3)(vii) of the India Income-tax Act, 1922

3. If the answer to question No. 2 is in the negative, whether the said sum of Rs. 2,03,903 was liable to be taxed in the assessment year 1955-56 as held by the Tribunal

So far as the first question is concerned, the counsel for the assessee as well as the revenue are agreed that in view of the decision of the Supreme Court in the case of India Cements Ltd. v. Commissioner of Income-tax : [1966]60ITR52(SC) , this question has to be answered in the negative and in favour of the assessee. We answer question No. 1 accordingly in the negative and in favour of the assessee.

2. So far as questions Nos. 2 and 3 are concerned, they are raised with reference to the assessment year 1955-56, the corresponding accounting period being the financial year 1954-55, i.e., the year ending March 31, 1955. The assessee-company carried other business of manufacture of chemical and in particular of soda ash. During the years 1950-51 and 1951-52 there was a glut in the market, largely because of large imports of soda ash. Tata chemical Ltd. was another concern which was also manufacturing soda ash. These two companies found it difficult to carry on the business in soda ash profitably. The production was stopped. Representations were made to the Government of India in the Ministry of Commerce for imposing restrictions on the imports and for granting protection to the soda ash industry. By a resolution of the Government of India in the Ministry of Commerce No. I.T.A (18) 49, dated May 23, 1949, the Government directed the Tariff Board to inquire into the claims of the soda ash industry for protection. After hearing the representatives of the two companies that were producing soda ash, the Tariff Board submitted a report recommending the grant of protection to the soda ash industry for a period of three years ending March 31, 1953. There were several recommendations made in the report. The Tariff Board, inter alia, recommended the payment of a subsidy at the rate of Rs. 1-8-0 per cwt. to be granted to the assessee as well as Tata Chemical Works Ltd. on the sales of soda ash the produced by these two companies and that such subsidy should remain in force for a period of three years ending March 31, 1953.

3. By a resolution dated February 22, 1950, the Government accepted these recommendations made by the Tariff Commission. One of the recommendations accepted by the Government related to the subsidy of Rs. 1-8-0 per cwt. This recommendations was accept s by the Government subject to the following modification :

'Government accept the principle of a subsidy. Taking into account the different rates of duty now proposed and other factors, they consider that the subsidy should be of the amount of Re. 1 per cwt. This will be granted on soda ash produced by the companies mentioned and soda from the date of this resolution, provided the Government is satisfied that the companies actually sell the soda ash at the fair selling fair price recommended by the Tariff Board.'

4. It is the case of the assessee that in accordance with the resolution it became entitled to payment of a subsidy. There was a series of correspondence between the Government and the assessee as to the payment. Tata Chemical Ltd. had already been paid such subsidy. The assessee-company by its letter dated January 19, 1952, forwarded its claim for payment of the subsidy for the period commencing from October 1, 1950, up to July 12, 1951, supported by copies of orders, invoices, railway receipts and other documents. In this claim it was stated that 2,15,270 cwts. of soda ash was sold during the aforesaid period and a sum of Rs. 2,15,270 was claimed as subsidy payable by the Government to the assessee at the rate Re. 1 per cwt. Further, letters were addressed by the assessee to the Government and ultimately on October 27, 1952, the assessee served a notice under section 80 of the Code of Civil Procedure upon the Government making the claim of Rs. 2,15,270 and stating that if the said amount was not paid it would file a suit to claim the said amount from the Government. As neither the amount was paid pursuant to the statutory notice, nor was any reply sent to it, ultimately, in February, 1954, the assessee filed a suit being Civil Suit No. 40 of 1954 in the court of the Senior Sub-Judge, Surendranagar, claiming a sum of Rs. 2,15,270 by way of subsidy from the Government. Ultimately, pursuant to an agreement arrived at between the Government and the assessee as stated in the letter of the Under-secretary, Ministry of Commerce and Industry, Government of India, dated August 13, 1954, a sum of Rs. 2,03,903-2-0 was sanctioned to be paid by the President to the assessee as and by way of subsidy in respect of soda ash sold during the period October 1, 1950, to July 12, 1951. It was stated in this letter that this payment was to be in full and final settlement of the claim of the assessee for subsidy as agreed to amicably between the assessee and the Government. In view of the said agreement, during the accounting year 1954-55, relevant to the assessment year 1955-56, a sum of Rs. 2,03,903 was paid by the Government to the assessee in respect of the said subsidy. This sum of Rs. 2,03,903 comprised of Rs. 1,34,422 for the period October 1, 1950, to March 31, 1951, and Rs. 69,481 for the period April 1, 1951, to July 12, 1951. In the profit and loss account for the year ending March 31, 1955, the assessee showed the receipt of Rs. 2,03,903-2-0 as subsidy income.

5. We may incidentally state that for the year ending March 31, 1952, the assessee also received a sum of Rs. 1,03,240 as and by way of subsidy from the Government. In its assessment for the year 1952-53, the assessee contested the assessability of the said sum of Rs. 1,03,240 as forming part of the income during the accounting period ended March 31, 1952. The matter ultimately came up to the Tribunal and the Tribunal by its order rejected the contention of the assessee and held that this sum of Rs. 1,03,240 was income and was properly assessed for the year 1952-53.

6. For the assessment year 1955-56, the assessee also contended that the sum of Rs. 2,03,903 was not assessable for that year. It was contended before the Income-tax Officer on behalf of the assessee that this sum was not a receipt arising out of the business, profession or vocation; that it was casual and non-recurring in nature; that the payment of the amount was made specifically to re-start production and was, therefore, not business income. In the alternative, it was contended that as the receipt of Rs. 2,03,903 partly related to the income for the assessment year 1951-52 and partly to income for the assessment year 1952-53 and was not assessable during year 1955-56, the right to receive the said amount had accrued to the assessee in the earlier years in accordance with the resolution and notification of the Government of India. It was submitted that what was done later on was only, if at all, quantification and payment. The Income-tax Officer rejected both the contentions of the assessee and brought to charge the sum of Rs. 2,03,903 as income for the assessment year 1955-56. In an appeal by the assessee before the Appellate Assistant Commissioner the same two contentions were urged on behalf of the assessee but they were rejected by him and the order passed by the Income-tax Officer was confirmed by him.

7. The assessee preferred a further appeal to the Tribunal and urged the very same contentions. Thus, two questions arose for determinations before the Tribunal, viz., (1) whether the receipt of sum of Rs. 2,03,903 was income from business and/or whether it was a casual and non-recurring receipt and, therefore, exempt from payment of Income-tax and (2) when did this income actually accrue to the assessee and, therefore in which year, if at all it was assessable The Tribunal held that the receipt of Rs. 2,03,903 directly arose out of the assessee carrying on the business of manufacture and sale soda ash; that the subsidy was paid to compensate for the loss of profit which the assessee would have otherwise incurred on the manufacture and sale. Accordingly, the Tribunal took the view that the receipt of Rs. 2,03,903 was a revenue receipt and not casual and non-recurring and was assessable as business income of the assessee. So far as the second contention urged on behalf of the assessee was concerned, the Tribunal held that the assessee had been adopting the mercantile system of accounting as far as that business was concerned; that it did not disclose or offer to disclose for assessment for the year 1951 or the year 1952 any part of the receipt of Rs. 2,03,903 but had shown it as a subsidy income in its profit and loss account for the year ending March 31, 1955. The Tribunal, however, took notice of the fact that the assessee's method of maintaining accounts in the books of account will not be decisive of the proper year for which the said amount has got to be considered for assessment. The Tribunal ultimately pointed out that the assessee actually received the amount during the year under consideration; that the amount not having been offered for assessment in the earlier year as having accrued or arisen in the said earlier year, it had to be taxed in the year under consideration. Questions Nos. 2 and 3 referred to above arise out of this order of the Tribunal.

8. In respect of question No. 2 Mr. Kolah, on behalf of the assessee, contended that the sum of Rs. 2,03,903 was received as capital receipt, as one of the objects underlying this payment was to relieve unemployment by reason of the closure of the business of the assessee. He submitted that this receipt was not a trade receipt. He further submitted that the subsidy was stopped after March 31, 1953, and therefore, the entire receipt of Rs. 2,03,903 was a casual and non-recurring nature. He, therefore, submitted that under section 4(3)(vii) of the Indian Income-tax Act, 1922, such receipt was not assessable at all in the hands of the assessee. Mr. Joshi, on behalf of the revenue, on the other hand contended that this was a revenue or a trade receipt; that the object underlying the grant of subsidy to the assessee and Tata Chemicals Ltd. was to enable the two companies to carry on their business profitably; that simply because the subsidy was payable for the period up to March 31, 1953, it cannot be regarded as of a casual and non-recurring nature.

9. Section 4 of the Act sets out the various items of income, profits or gains from whatever source derived which are to be included in the total income of the assessee for the purposes of assessment. Under this section all income, profits and gains from whatever source derived which accrue or arise to an assessee in the taxable territories during the previous year are to be included. Under clause (vii) of sub-section (3) of section 4 any receipts not being capital gains chargeable according to the provisions of section 12B and not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature or are not by way of addition to the remuneration of an employee, are to included in the total income of the person receiving the same. The question to be considered in the present case is whether the sum of Rs. 2,03,903 which was received by the assessee from the Government was a capital receipt and whether it was of a casual and non-recurring nature. It is an admitted fact that during the years 1950 and 1951-52, there was a glut in the market of soda ash largely because of large imports thereof. The assessee as well as Tata Chemical Ltd., which was the other concern manufacturing soda ash, found it difficult to carry on the business profitably and the production of soda ash was stopped. Under these circumstances a representation was made to the Government and the Government in its turn referred the matter for recommendations to the Tariff Board. The Tariff Board in their recommendations, inter alia, pointed out that the factory of the assessee and Tata Chemical Ltd. were closed down in April, 1949, because of their liability to dispose of the stocks due to excessive of soda ash during the year 1948-49, and the consequent fall in the selling prices. In the recommendations the tariff Board also pointed out that the fair selling price of the indigenous soda ash for 1949-50 is Rs. 16.83 per cwt. as compared with the latest landed cost ex-duty of imported Magadi soda ash of Rs. 11.92 per cwt. The Tariff Board recommended that the existing units of the soda ash industry deserve the grant of protection an assistance for a period of three years in the first instance. It, inter alia, recommended that the existing preferential revenue duty of 18 per cent. should be raised to 30 per cent. and made a protective duty. On this basis it was pointed out in the recommendation that the landed cost without duty of imported soda ash (Rs. 11.92 per cwt.) and the protective duty of 30 per cent. recommended by the Board (Rs. 3.43 per cwt.) will bring the landed cost with duty of imported soda ash to Rs. 15.35 per cwt., thus indicating a difference of about Rs. 1.5 per cwt. between the Board's estimate of the fair selling price of indigenous soda ash (Rs. 16.83 per cwt) and the landed cost with duty (Rs. 15.35 per cwt). This difference of Rs. 1.5 per cwt. should be made good to the industry by way of a subsidy on the sales of soda ash produced by the two factories after they have restarted operations. This subsidy should be payable for the period during which the protective duty is in force, i.e., up to March 31, 1953.

10. When the recommendations of the Tariff Board were considerably by the Government, the recommendation regarding subsidy was partially approved of by the Government and the Government, inter alia, resolved that takings into account the different rates of duty proposed and other factors, the subsidy should be of the amount of Re. 1 per cwt. This will be granted on soda ash produced by the companies mentioned and soda from the date of the resolution, provided the Government is satisfied that the companies actually sell the soda ash at the fair selling price recommended by the Tariff Board. The amount of Rs. 2,03,903 was paid to the assessee pursuant to this resolution passed by the Government.

11. The argument of Mr. Kolah was that this subsidy was granted with the objective of relieving unemployment. Neither in the recommendation of the Tariff Board nor in the Government resolution reference to such objective is to be found, though, undoubtedly, as the production had stopped and it was to be restarted, then, naturally, unemployment would be relieved to a certain extent, but the sole object underlying the grant of subsidy was that the assessee as well as Tata Chemical Ltd. may be able to carry on their business of manufacture of soda ash profitably in competition with the price of imported soda ash.

12. The question whether subsidy or grant from the Government should be treated as a revenue receipt or a capital receipt is well-settled in view of the decision of the House of Lords in Ostime (H. M. Inspector of Taxes) v. Pontypridd and Rhondda Joint Water Board [1946] 28 TC 261; 14 ITR (Supp) 45. At page 278 Viscount Simon laid down two proposition as under :

'The first proposition is that, subject to the exception hereafter mentioned, payments in the nature of a subsidy from public funds made to an undertake to assist in carrying on the undertakes trade or business are trading receipts, that is, are to be brought into account in arriving at the balance of profits or gains......

The second proposition constitutes an exception. If the undertakes is a rating authority and the subsidy is the proceeds of rates imposed by it or comes from a fund belonging to the authority, the identity of the source with the recipient prevent any question of profits arising; ......'

13. Normally, it is well-settled that where subsidies or grants are given by the Government to assist a trader in his business they are, generally speaking, payments of a revenue nature. They are supplementary trade receipts and not capital payments although they might be called advances or might be subject to contingency of repayment. It is clear from the recommendations of the Tariff Board which were partially accepted by the Government by its resolution dated February 22, 1950, that the object underlying the grant of subsidy was to enable the assessee-company and Tata Chemical Ltd. to carry on their business of soda ash profitably. The position underlying the market was such that the landed cost or imported soda ash was much less. Therefore, protective duty was imposed on it but even with such protective duty the price of imported soda ash was less than the price at which indigenous product would be sold and, with a view to make good the difference, the Government granted a subsidy of Re. 1 per cwt. Such receipt under the tests laid down by Viscount Simon is clearly a revenue receipt and has to be taken into account in arriving at the income, profits and gains of the business.

14. Reliance was placed by Mr. Kolah upon the decision of the House of Lords in the case of the Seaham Harbour Dock Company v. Crook (H. M. Inspector of Taxes) [1931] 16 TC 333. In this case a dock company contemplating an extension of its dock applied to the Unemployment Grants Committee for financial assistance. The Committee consented to sanction grants from time to time, as the work progressed and was paid for equivalent to half the interest for two years (not exceeding an average rate of 5 1/2 per cent. per annum) on approved expenditure met out of loans. Payments were made on this basis several times a year for some years. Assessments to income-tax were made upon the company upon the footing that these payments were part not annual profits or gains liable to income-tax.

Lord Buckmaster said at page 353 :

'It was a grant which was made by a government department with the idea that by its use men might be kept in employment... I find myself quite unable to see that see that it was a trade receipt.......'

Lord Atkin said at page 353 :

'... When they were received, they were received by the appropriate body not as part of their profits or gains or as a sum which went to make up the profits or gains of their trade.'

15. So far as the subsidy received by the assessee from the Government was concerned, it could not be regarded as falling into the same category as unemployment grant in the Seaham Harbour Dock Company's case [1931] 16 TC 333. On the contrary, it was received as a sum which enabled the assessee-company to carry on its business of manufacture of soda ash profitably.

16. It was urged by Mr. Kolah that under the resolution of the Government the subsidy was payable only for the period ending March 31, 1953, and so the receipt was of a casual and non-recurring nature and was, therefore, not includible in ascertaining the profits or gains of the business. It is not possible to accept this contention. The sole object underlying the grant of subsidy was to enable the assessee-company to carry on its business profitably in order that it might not suffer losses having regard to the prices at which imported soda ash could be sold in the country even after protective duty was imposed thereon. The sole object underlying the resolution was to enable the assessee-company and Tata Chemical Ltd. to carry on their business in a commercial manner so that it would yield profits. Thus, when such is the position, then even though it is payable for a limited duration ending March 31, 1953, it cannot be regarded as a casual or non-recurring receipt. So long as the resolution of the Government was in force of production and sale of soda ash by the assessee-company and Tata Chemical Ltd. they will be entitled to subsidy at the rate Re. 1 per cwt. subject to the condition that the Government was satisfied that they actually sold soda ash at fair selling prices recommended by the Tariff Board. Looked at from this point of view it is quite clear that the receipt of the amount of Rs. 2,03,903 by the assessee was neither a capital receipt nor was it of a casual or non-recurring nature. Accordingly, question No. 2 has to be answered in the negative and in favour of the revenue.

17. That takes to the third question which has been referred to us for our determination. The sum of Rs. 2,03,903 was received by the assessee in the accounting year 1954-55 relevant to the assessment year 1955-56 and it has been subjected to tax in the assessment year 1955-56 both by the taxing authorities as well as by the Tribunal. It was urged by Mr. Kolah that this sum of Rs. 2,03,903 comprised of two items, namely, the sum of Rs. 1,34,422 and sum of Rs. 69,481. The first item of Rs. 1,34,422 related to the sales during the period of October 1, 1950, to March 31, 1951, and his submission was that as the amount was paid in respect of the sales effected during this period, it ought to be assessed in the assessment year 1951-52. The sum of Rs. 69,481 related to the sales effected by the assessee-company during the period April 1, 1951, to July 12, 1951, and it ought to be assessed in the assessment year 1952-53. He submitted that as the sales were effected during these relevant periods the right to receive the subsidy accrued on the assessee during each accounting period when the respective sales were effected and the accrual cannot be postponed merely because the Government, in spite of demands, did not pay the amount and ultimately the amount was paid after a suit was filed by the assessee against the Government. He submitted that even though the accounts of the assessee-company are maintained on mercantile system of accounting, as the amounts accrued during the two assessment years 1951-52 and 1952-53, they were not liable to be taxed by the taxing authority as well as by the Tribunal during the assessment year 1955-56. Mr. Joshi, on behalf of the revenue, on the other hand, contended that if regard be had to the resolution passed by the Government on February 22, 1950, it is quite evident that upon a mere sale by the assessee-company of soda ash manufactured by it after the date of the resolution, a right to demand subsidy did not accrue to the assessee. Such amount of subsidy was payable by Government to the assessee only after the Government was satisfied that the assessee-company actually sold the soda ash at the fair selling price recommended by the Tariff Board. He pointed out that when the demand was made for the first time by the assessee by its letter dated January 29, 1952, the sum demanded was Rs. 2,15,270 and that was on the basis of the sale of Rs. 2,15,270 cwts. of soda ash. The Form 'A' annexed to this letter clearly indicated that the total quantity of 2,15,270 cwts. of soda ash was sold in two lots at different rates, 400 cwts. of soda ash were sold at a price exceeding Rs. 16.2 per cwt. f.o.r. Dhrangadhar, and the balance of 2,14,870 cwts. was sold at the rate exceeding Rs. 15.7 per cwt. f.o.r. Dhrangadhar. Undoubtedly, this letter does not appear to have been replied to by the Government and further reminders were sent to the Government for settlement of the claim by the assessee's letters dated November 10, 1952, and November 22, 1952. As, in spite of these reminders, the amount was not paid by the Government, ultimately, a statutory notice under section 80 of the Code Civil Procedure was given by the assessee to the Government on October 27, 1952, and as nothing was done in spite of receipt of this statutory notice in the month of February, 1954, a suit was filed being Civil Suit No. 49 of 1954 in the court of the learned Senior Sub-Judge, Surendranagar, to claim the sum of Rs. 2,15,270. Mr. Kolah has placed strong reliance upon the observation made by the Tribunal to the effect : 'This is not a case where the satisfaction of the Government as to actual sale at the price fixed by the Government came into play at all or prevented or stopped accrual of the income', and has submitted that as this is an agreed statement of case such a finding by the Tribunal is binding on this court and it is not open to the counsel for the revenue to urged that the rates at which soda ash was sold by the assessee-company were not accepted by the Government and the sum of Rs. 2,03,903 actually accrued due to the assessee as a result of an agreement which is referred to in the letter dated August 13, 1954, from the Under-Secretary, Ministry of Commerce and Industry, Government of India, to the Deputy Accountant-General, Industry and Supply, New Delhi.

18. The short question that we have to consider on the facts of this case is when the right to receive the sum of Rs. 2,03,903 accrued or arose to the assessee for the first time. Did it accrue at the time when the sale was effected in the relevant accounting period or it accrued at the time when the Government was satisfied as regards the appropriate rate at which soda ash was sold and agreed to pay the amount of subsidy Even though the Tribunal in its order has stated that this is not a case where the satisfaction of the Government as to the actual sale at the price fixed by the Government came into play at all or prevented or stopped accrual of the income, it is quite clear that the claim made in the notice as well as in the suit has not been accepted in to by the Government. Actually, under the resolution of the Government, the right to subsidy at the rate of Re. 1 per cwt. would arise for the first time not by mere reason of sale of soda ash but only when the Government was satisfied that the assessee actually sold soda ash at the fair selling prices recommended by the Tariff Board. In the recommendations of the Tariff Board it is clearly pointed out that the assessee-company was expected to sell soda ash at the rate of round about Rs. 15.35 per cwt. When the Government is satisfied that it had been sold at a fair selling price as recommended by the Tariff Board, then alone a right will accrue to the assessee-company to ask for subsidy. Actually, it is not clear from the very first letter dated January 29, 1952, whereby demand for Rs. 2,15,270 was made of subsidy from the Government that part of soda ash was at a rate higher than what was recommended by the Tariff Board. Mr. Kolah is right that the claim has not been denied in writing but very fact that even after the suit a lesser amount is paid clearly shows that it was not accepted in toto. In fact, the letter dated August 13, 1954, from the Under-Secretary Ministry of Commerce and Industry, Government of India, to the Deputy Accountant-General, Industry and Supply, New Delhi, clearly shows that the President gave his sanction to payment of Rs. 2,03,903-2-0 to the assessee-company on account of subsidy payable to it in respect of soda ash sold during the period October 1, 1950, to July 12, 1951. The letter further proceeds to state that this payment is in full and final settlement of the claim of the assessee-company for subsidy as agreed to amicably between the firm and the Government. It is quite clear from the contents of his letter that the right to receive the sum of Rs. 2,03,903 accrued or arose to the assessee for the first time when the amicable agreement as recorded in this letter was arrived at. Pursuant to this agreement, as shown by the various endorsements at the foot thereof the assessee-company was required to forward a bill claiming the sum of Rs. 2,03,903 for counter-signature of the appropriate authority and for arranging payment. This right to receive this amount accrued for the first time to the assessee-company in the financial year 1954-55 and as the amount was actually received during that year, it has been rightly assessed to tax in the assessment year 1955-56.

19. Reference was made by Mr. Kolah to the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax : [1971]82ITR363(SC) . In this case the Supreme Court has held that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. It is undoubtedly true that, for the accounting year ending March 31, 1955, the assessee-company has shown the receipt of subsidy income of Rs. 2,03,903 as a receipt but it is not by reason of such entry that we have held that the amount accrued or arose for the period. According to us the right to receive this amount accrued or arose for the first time to the assessee-company only when the Government was satisfied as regards the fair selling price at which soda ash sold by the assessee and arrived at the actual figure by mutual settlement with the assessee. Such an event took place in or about August, 1954, and therefore, the right to receive the amount accrued after such amicable agreement.

20. Reference was also made by Mr. Kolah to the decision of the Bombay High Court in the case of Vishnu Agencies Private Ltd. v. Commissioner of Income-tax : [1963]48ITR444(Bom) . In this case the assessee, which maintained its accounts on the mercantile system, acted as transport contractor to the Government. After transporting sugar from the docks to the godowns for some time, the assessee found that the sufficient load for its trucks were not provided. The assessee brought this fact to the notice of the Government, but as no action was taken by the Government, the assessee informed the Government that it would not be possible for it to supply any more trucks until the loading conditions were improved. For the work it had done already a sum of Rs. 1,45,395 was due to the assessee during the relevant previous year. Although it had debited in its accounts the expenses incurred by it in connection with the work, the assessee did not take the sum due to it to the revenue account on the ground that the Government had raised a dispute with regard to the payment of its bills. The bills submitted by the assessee were required to be presented to the Pay and Accounts Officer, but the Government claimed deduction from the amount of the bills, such amounts as would be due towards damages for breach of contract on the part of the assessee. The Tribunal found that the Government had not disputed the amounts of the bill but had accepted the liability in full and only claimed to withhold payments on the grounds of breach of contract and that, therefore, the sum of Rs. 1,45,395 had accrued to the assessee. On a reference, the High Court held that the sum of Rs. 1,45,395 accrued at the time when the bills were accepted and its accrual had no reference to the time when it would be actually received. The mere assertion of a claim on the part of the Government for damages for breach of contract was not sufficient to make the claim an enforceable one or to affect the accrual of the income to the assessee. The sum of Rs. 1,45,395 accrued to the assessee during the relevant previous year.

21. So far as the facts of the case before us are concerned, it is quite apparent that until the Government was satisfied as regard the fair selling price at which the soda ash had been sold it was not under an obligation to pay the subsidy. Actually, notwithstanding the demand and the statutory notice under section 80 of the Code of Civil Procedure and the institution of the suit, the amount as claimed was not paid. On the contrary, the whole of the amount claimed has not been accepted and a deduction therein has been arrived at by an amicable settlement between the Government and the assessee-company. Such an amicable settlement was arrived at for the first time in or about August, 1954, and it was, thereafter, that the amount of Rs. 2,03,903 was paid. Thus, so far as the facts of the case before us are concerned, there can be no doubt whatsoever that the amount of Rs. 2,03,903 accrued for the first time after the amicable the settlement was arrived at between the Government and the assessee-company and has been rightly subjected to tax in the assessment year 1955-56.

22. In the result, our answer to question No. 3 is in the affirmative. The assessee shall pay the costs of the reference.


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