1. The question referred in this reference under section 66 (1) of the Indian Income-tax Act, 1922, is :
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 35,251 claimed by the assessee from the Nadiad Municipality is liable to inclusion in the income of the accounting year ended March 31, 1961, under section 10 and 13 of the Income-tax Act, 1922 ?'
2. The reference arises out of assessment made upon the assessee-company for the assessment year 1961-62, the relevant accounting year being the one ended on 31st March, 1961. The assessee-company was carrying on the business of supplying electricity to consumers at Nadiad. One of such consumers was the Nadiad Municipality. There was an agreement between the assessee-company and the Nadiad municipality under which the assessee-company was to supply electricity to the Nadiad Municipality for 'street lighting, etc., purpose' at the rate fixed in the agreement at 19 paise per unit. The normal rate charged by the assessee-company to its other consumers was 30 paise per unit. The agreement was for a fixed period of ten years which expired on 31st August, 1960, i.e., during the accounting year relevant to this reference. After the expiry of the agreement, the assessee-company started sending bills to the Municipality, however, disputed the assessee company's right to charge it at the rate of 30 paise per unit and paid the amount of the bills calculated at the rate of only 19 paise per unit. Within a few months the municipality filed a suit, being Suit No. 288 of 1960, in the Civil Court at Nadiad to get the agreement renewed on the same terms and conditions. The trial court dismissed the suit on the municipality. The municipality went in appeal to the district court, which also dismissed the appeal. An appeal was thereafter filed to the Gujrat High Court. The appeal was heard by a single judge and he held that the assessee-company was bound to continue supply electricity to the municipality on the same terms and conditions as those contained in the agreement which expired on 13th August, 1960. We are now informed by counsel that a Letters patent Appeal was filed and the judgment in the Letters patent Appeal in effect confirmed the judgment of the learned single judge.
3. The assessee-company maintained its books of account on the mercantile system. In respect of the electricity supplied by the assessee-company to the Municipality after the expiry of the said agreement the assessee-company credited the amount actually received which was calculated at the rate of 19 paise per unit, but the balance of the amount calculated at the rate of 11 paise per unit which at the end of the accounting year, i.e., on 31st March, 1961, amounted to Rs. 35,251.02, was shown by it in its balance-sheet as an asset under the head 'Sundry creditors considered doubtful'. The revenue sought to bring to tax the said amount Rs. 35,251.02. The Tribunal has held the said amount not to be includible in the assessable income of the assessee-company. This reference has, therefore, been made at the instance of the Commissioner of Income-tax.
4. As the assessee-company maintains its books of account on the mercantile system, all income, profits and gains which accrued or arose to the assessee-company during the accounting year are liable to be brought to tax. The said amount can be brought to tax only if it accrued or arose. An amount can accrue or arise to an assessee when the assessee acquires a legal right to recover that amount, that is, conversely, that amount becomes legally due to the assessee by the assessee's debtor. What has happened in this case was that on the expiry of the agreement the assessee-company only sent its bills to the municipality made out at the rate of 30 paise per unit. Sending the bills amounts to merely making a claim for the amounts mentioned in the bill. The mere sending of bill does not create a legal enforceable right in the assessee-company, nor a corresponding legal enforceable obligation on the municipality. There would be a legal enforceable claim or obligation only if there was an agreement, express or implied, in that behalf or there was some statutory or similar right or obligation. In this case it is common ground that the agreement had expired as the period stipulated therein came to an end. Unfortunately, there is nothing in the statement of the case or in any of the documents annexed thereto forming part of it to show whether the assessee-company had any legal right to claim from the municipality payment at the rate of 30 paise per unit. Our attention has, however, been drawn to the judgment of the learned single judge of the Gujrat High Court in the said case which is Nadiad Borough Municipality v. Nadiad Electricity Co. Ltd. That judgment holds that the assessee-company was bound to continue to supply electrical energy to the Nadiad Municipality at the same rates as were specified in the said agreement. We are informed that this judgment has been confirmed by a Division Bench of the Gujrat High Court in the Letters Patent Appeal. We have referred to this judgment as it is a case reported in an authorised law reporter. But so far as the record of this case goes, there appears to be nothing to show that there was any right or obligation in the assessee-company to charge the municipality for the electrical energy supplied to it at the rate of 30 paise per unit. The sending of the bills at 30 paise per unit was merely an attempt made by the assessee-company to recover from the municipality amounts calculated at that rate. On the record there is nothing to show that the assessee-company had any such legal right. What the assessee-company in fact recovered was at the rate of 19 paise per unit. In the circumstances, in our opinion, the assessee-company was under no obligation to credit in its books of account, even though they were maintained on the mercantile system, any amount for the electricity supplied by it to the municipality calculated at any rate other than the rate of 19 paise per unit and the only amount which could be brought to tax in this connection would be the amount calculated at the rate of 19 paise per unit.
5. Under the circumstances, we answer the question in the negative.
6. The Commissioner to pay the assessee-company's costs.