The judgment of the court was delivered by
CHANDRA REDDY C.J. - The question to be answered by us under section 66(1) of the Indian Income-tax Act, 1922 (XI of 1922) is formulated in these words :
'Whether on the facts and in the circumstances of the case the sum of Rs. 44,000 was income liable to assessment in the assessment year 1956-57 or was income liable to assessment in the assessment year 1955-56 ?'
The assessee is a partnership carrying on business of milling paddy into rice and selling it. In the year 1954, that is, on the 9th May, 1954, the assessee was appointed as the procuring agent by the Government of Andhra State for procuring paddy under the Voluntary Procurement of Paddy and Compulsory Procurement of Paddy Schemes. After procuring the paddy, the assessee had to mill it into rice and hold the stocks on behalf of the Government of India. Under the terms of the agreement the assessee had to purchase from producers paddy with his own funds under the schemes mentioned above and then convert it into rice in such a manner that the rice should conform to the standard civil supplies specification detailed in Schedules IV and V appended to this agreement and in lieu of the quantities so converted for every 100 maunds paddy procured by him, he was liable to supply 70 maunds of rice. One of the conditions of the agreement was that the procuring agent shall not dispose of the stocks of paddy and/or rice held by him on behalf of the Government, except under and in accordance with the directions of the District Collector or any officer authorised by him. He had also to arrange to export outside the State on behalf of the Government such quantities of rice and within such time and to such places as he may be directed from time to time by the District Collector or any officer authorised by him. The procuring agent will be paid for the rice so exported at the f.o.r. rate specified in Schedule I appended to this agreement. He was also under an obligation to deliver at his mill or godown such quantities of rice and within such time and to such persons as may be directed from time to time by the District Collector or any officer authorised by him, and he will be paid for the rice so delivered at the ex-mill rates specified in Schedule I appended to this agreement, including some allowances set out in paragraph 8 of the form of agreement similar to the one entered into between the parties.
We would like to state here that these facts are culled out from a form of agreement filed before us by the learned counsel for the assessee to which no exception was taken by the counsel for the department.
Now to proceed further with the narration, there were stocks of rice held by the assessee on behalf of the Central Government after supply to Madras and Travancore-Cochin States and to the central reserves. The Central Government felt that they were not in need of further stocks. Therefore an agreement was reached between the assessee and the Government of Andhra State with the concurrences of the Central Government to permit the assessee to dispose of their stocks as their own risk against payment of a suitable compensation which was fixed at Rs. 2-6-0 per maund.
We will do well here to the relevant portion of G. O. Ms. No. 1120 dated May 14, 1955, of the revenue department of Andhra. Here again we have to say that we are requested by both the parties to treat this memorandum as part of the record, though it does not seem to have been filed any officer of the department or even before the Income-tax Appellate Tribunal.
'Out of the stocks so procured and held by the Government agents, some stocks, which have been left over after supply to Madras and Travancore-Cochin States and to central reserves, are still remaining with them. These stocks are held by them on behalf of the Government of India for supply to central reserves. The Government of India have stated that they do not require these stocks and have agreed to allow the procuring agents to dispose of these stocks on their private accounts against payment of suitable compensation. It has therefore been decided, with the concurrence of the Government of India, to release these stocks now remaining with the procuring agents of Krishna and West Godavari districts for sale on their private account at their own risk in whatever manner they choose and pay them compensation at the rate of Rs. 2-6-0 per maund on the above stocks after obtaining a receipt from them discharging the Government completely from all obligations and liabilities arising in any manner whatsoever in respects of the agreements already executed by the procuring agents and in respect of all the stocks covered by those arguments.'
On the basis of this order, a sum of Rs. 44,000 was paid to the assessee in July, 1955. In the return submitted by the assessee for the assessment year 1956-57, he included this sum of Rs. 44,000. In the light of this return, the taxable income of the assessee was determined by the Income-tax Officer. In the appeal carried by the assessee before the Appellate Assistant Commissioner no question as to whether this amount was received in the accounting year 1954-55 or 1955-56 was raised. Notwithstanding this, the Income-tax Appellate Tribunal permitted the assessee to raise this point for the first time in the further appeal brought before it.
After hearing the arguments of the department as also the counsel for the assessee and referring to the case-law on the subject, the Tribunal arrived at the decision that the income was properly assessed as the income includible in the assessment year 1956-57, 'the claim having been accepted by the Government in the accounting year as well as the payment having been received by the accounting year as well as the payment having been received by the assessee in the accounting year relatable to that assessment.' In the result, the appeal was dismissed. However, at the request of the assessee, a reference under section 66(1) was made by the Tribunal.
It is this view of the Income-tax Appellate Tribunal that is impugned before us. It is urged on behalf of the assessee by Shri B. V. Subrahmanyam, learned counsel, that as the sum of Rs. 44,000 was referable to the contract entered into between the assessee and the relevant Government on May 9, 1954, this income had accrued in 1954 and consequently this could not be included in the assessment for the assessment year 1956-57.
Support is sought for this argument from Gajapathi Naidu v. Commissioner of Income-tax. That decision lends some colour to the contention advanced on behalf of the assessee. There, the owner of a bakery and provision shop supplied bread to a Government hospital on contract at certain rates. As the rates were found to be uneconomical, he requested the Government after the close of the year to make an extra payment to relieve the contractor of the loss sustained in the supply of bread. The Government acceded to this representation and directed payment of compensation amounting to Rs. 12,447 which amount was received during the year of account corresponding to the assessment year 1951-52. The Income-tax Officer included this amount of Rs. 12,447 in the assessable income of the contractor for the assessment year 1951-52. The assessee contested the inclusion of the pleas, inter alia, that the amount being received under the contract performed in the assessment year 1949-50, it could not be included in the assessment year 1951-52. Though this objection did not weigh with the department, it found acceptance with the High Court of Madras. The learned judges ruled that although the payment of Rs. 12,447 was an act of grace on the part of the Government, it was directly related to the business of the assessee and the receipt was one arising out of his business, and as such it should be regarded as income received in the year 1949-50 and it could not be included in the assessment year 1951-52.
In support of this view, the learned judges relied on a passage from the judgment of the Supreme Court in E. D. Sassoon & Co. v. Commissioner of Income-tax, which runs as follows :
'It is clear, therefore, that income may accrue to an assessee without the actual receipt of the same. If the assessee requires a right to receive the income, the income can be said to have accrued to him, though it may be received later on its being ascertained. The basic conception is that he owed to him by somebody. There must be as is otherwise expressed debitum in praesenti solvendum in futuro.... Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.'
With great deference to the learned judges, who decided Gajapathi Naidu v. Commissioner of Income-tax, we feel that this passage, far from strengthening their view, militates against it. It is clear from the observations of the Supreme Court, as extracted here, that the income can be said to have actually accrued only when he had a right to receive a particular sum. A debt should be created in favour of the assessee and due from someone. It could not be postulated that the contractor in that case had acquired a right to receive the additional payment, or debt was created in his favour. As observed by the learned judges themselves, it was an ex gratia payment and it did not represent any right which had vested in him.
Now coming to the decisions of the English courts on which reliance has been placed by the learned judges, the first of the cases cited by them, Commissioners of Inland Revenue v. Newcastle Breweries Ltd., does not really vouch the proposition stated by them. What happened there was this : The assessee carried on the business of Brewers of wine, and in the course of their business, kept large stocks of rum which was reduced and blended before sale. A portion of the assessees stocks of rum was requisitioned by the Admiralty in January, 1918, and payment therefor at a specified rate was accepted by the company without prejudice to a claim for a larger payment. Consequent upon the litigation that followed in regard to the actual payment due, a sum of money was paid in November, 1921, in addition to what was paid originally towards the price of the rum requisitioned by the Government. It was held that the receipt in question must be included for excess profit duty for the accounting period ending on October 30, 1918, in which year the rum was taken over, as it was attributable to the requisition in that year, despite the ascertainment of this sum much later. The observations of Warrington L. J., at page 948, which are opposite in this inquiry, run as follows :
'Treating the transaction, as I think we ought to do, as a commercial transaction, the property in the goods passed by delivery during the accounting period and the money then became payable, although, owing to a dispute as to the amount, it was not ascertained or paid in full until some years later, and if this be so then the whole amount, and not merely that part of it is which was paid on account, would, in my opinion, be properly dealt with in ascertaining the profits for the accounting period.'
It is thus seen that the court proceeded on the assumption that the right to receive the larger sum had already accrued to the assessee when the requisition was made. It is to be noted that the rum was requisitioned at a particular rate without prejudice to his right to claim a larger sum. Therefore, that does not furnish an analogy to Gajapathi Naidus case.
To a like effect is the case of Commissioners of Inland Revenue v. Gardner, Mountain and DAmbrumenil Ltd. Here again, the underwriting commission was earned in a year; but under the agreement between the parties the commission was to be settled and it became payable only two years thereafter. A question arose as to the year in which the income by way of commission accrued and it was decided that the accrual was on the date of the transaction, although the payment was postponed by two years and it was only then it was quantified. There again, the right to receive the commission had arisen when it was earned. Only the ascertainment of the amount to be paid was postponed by two years.
The two cases could, therefore, be easily distinguished.
Another case adverted to is James Spencer & Co. v. Commissioners of Revenue, in which the position was summed up by Lord President Cooper in these words (quoted by the learned judges) :
'From an examination of the numerous cases conveniently summarised in Simon on Income Tax II, 128 ff., the broad working rule which emerges as a guide to the crediting or debiting in a tax computation of subsequently maturing credits or debits is to enquire in which accounting period the right or liability was established and to carry the item into the account in that year. I use the vague word established advisedly, for we are now in the region of proper commercial and accountancy practice rather than of systematic jurisprudence. In the case of credit items, such cases as Newcastle Breweries and Isaac Holden and Sons, indicate that, if the title to the sum arose in one accounting period, the fact that the precise amount of the credit was not fixed until later will not prevent the eventual receipt being credited in the earlier year. So too, in the case of expenses, as is illustrated by Ford and Bernhard. In Bernhard (page 741) Lord Hanworth M. R. put the matter thus : If there is a liability existing at a particular date, the fact that it is, subsequently to that date, determined and ascertained, does not prevent that liability belonging historically to its right place in the accounts. The quantum of it is ascertained at a later date; but the payment is to be made as at the date when it rightly occurs in the accounts, even if the quantum of it cannot be fixed at that moment.'
It is manifest from this passage that it is only when a right has accrued or a liability created in a particular year, the income can be said to have accrued or liability created in the year in spite of the fact that the ascertainment of the amount or the receipt of it is postponed to a subsequent date. It cannot be posited that an ex gratia payment is the result of a right.
The following observations of Rowlatt J. (extracted by their Lordships of the Supreme Court) in Isaac Holden and Sons Ltd. v. Commissioner of Inland Revenue are to be understood in the light of the rule enunciated by Lord President Cooper :
'These woolcombers had done a certain amount of work by June, 1918, and they were paid the 1917 tariff plus 10 per cent. up to June, 1918. It was uncertain whether they ever would receive more at that time : they certainly had no right to demand more. It was uncertain that they ever would receive more, and it might be that they would receive less the next half year. That is quite clear, but in the result what happened They were paid 20 per cent., that is to say, 10 per cent. more, in respect of the whole 1918; pound for pound of their work they earned another 10 per cent. beyond what had been paid them in June, 1918; if they did more work they got more; if they did less work they got less. It was paid to them, as the Solicitor-General says, in respect of work in 1918, including the half-year. Looking at it merely on those facts, what have I to say Did not that arise from the work that they did in their trade in the first half of 1918 If not, what did it arise from Could it be said that it arose from, unless it arose from the facts other than that which leads me to say that these profits arose from the business in the accounting period, and, therefore, that the decision of the Commissioner was right. As the fact which shows that the books were wrong has occurred after they have been closed, I do not see any difficulty in reopening them and putting them right.'
If, however, these remarks are to be understood as justifying the conclusion that the payment could be said to have been received in the year in which the business was carried on and not when it was received and though he had no right to demand more than what was stipulated at the time of the contract and the increase was made subsequently, that ratio could not be applied to the income-tax law as obtaining in India.
Another case relied upon by the learned judges was Severne (H. M. Inspector of Taxes) v. Dadswell, which enunciates a principle similar to the one in Isaac Holden & Sons.
It is interesting to note that in Madalai Nadar & Co. v. Commissioner of Income-tax a Bench of Madras High Court, to which one of the judges who rendered Gajapathi Naidus case was a party, remarked as follows :
'The question is, can the principle laid down in the Newcastle Breweries Ltd. case and extended in Dadswells case be further extended to a case of remission of a tax by the Government. We have already pointed out that it could not be called a debt payable to the Government to the assessee. Nor could it be treated as something analogous to a trade debt. No doubt the tax was imposed originally in the year of account on the basis of the trade activities of the assessee. But it is equally true that it was for a tax that was eventually remitted and paid to the assessee, paid not in the year of account but in the succeeding years of account. But it was not payment by way of remuneration, as in the case of Mr. Dadswell, for anything done by the assessee in the course of his trading activities in the year of account. Once again, we have to point out that the tax was lawfully levied and lawfully collected. The Government decided to remit the tax, and payment was receipt of Rs. 36,094 within the scope of the ruling in Severne v. Dadswell and treat it as income to which he was entitled in the relevant year of account.'
In Madalai Nadars case, excise duty was paid by the assessee on quantities of arecanuts imported from the former Travancore State. However, the Government revised their policy and issued instructions which directed the excise authorities not to enforce payment. Those instructions being in the nature of purely executive instructions were not acted upon and the assessee made the payments, he not being aware of the same at that time. Then next year, this amount was refunded to the assessee. In the assessment of the assessee for the year in which the excise duty was paid, the department sought to include the receipt of the later year. It was decided by the High Court this remission of tax could not be traced to any legally enforceable right against the Government, and it could not be treated as a debt payable to the assessee as something analogous to a trade debt. Therefore, there was no liability on the Government to pay the amount to the assessee which he could credit himself within the year in which the excise duty was paid and the amount could not be included in the income of the assessee for that year of account. That case is thus an authority for the proposition that it is only when there is right that could be enforced to receive payment, it could be said to have accrued or arisen. In Gajapathi Naidus case, after referring to Madalai Nadars case, the learned judges observed that 'it cannot be equated to a case of payment made for work done or goods supplied by the assessee. In short, it had no resemblance to a trade debt.' That being so, we express our respectful dissent from the rule stated in Gajapathi Naidus case, which formed the bed-rock of the argument of the learned counsel for the assessee.
We might mention here that the Allahabad High Court had taken a view different from that in Gajapathi Naidus case. Referring to this decision, Kanga and Palkhivala in their Law and Practice of Income-tax (fifth edition, volume 1, page 174), commented thus : 'The decision to the contrary of the Madras High Court, relying on English decisions which are inapplicable since they are based on different statutory provisions, is, it is submitted, incorrect.'
We will presently show that even if the principle stated in Gajapathi Naidus case, is correct, it does not very much advance the case of the assessee.
Before we deal with the merits of the present reference, we will refer to the ruling of the Allahabad High Court in Commissioner of Income-tax v. Kalicharan Jagannath. During the accounting year April 1, 1945, to March 31, 1946, the assessee entered into a contract with and supplied fruits and bullock carts to the military authorities at Chheoki and at Kanpur at the rates fixed by the agreement. In regard to the supplies made by the contractor at Kanpur, he sustained loss. So he made representations to the authorities concerned for review under the terms of the agreement. Shortly thereafter, that is, in November, 1947, the military authorities sanctioned the payment of an additional sum. This was paid to the assessee in February 1948. The income-tax department sought to include this additional sum in the assessment for the accounting year 1945-46. The High Court of Allahabad held that until the order of review was made, the only right that the assessee had was to claim the money payable at the rates laid down in the agreement itself and the additional amount became payable to the assessee not by virtue of any right conferred by the agreement, but because of the order passed in review under the terms of the agreement directing the payment of the amount. So the amount payable could not be included in the assessable income if the assessee in 1945-46. The learned judges remarked that the right to receive the payment of the additional sum could at the earliest have risen or accrued in November, 1947, after the close of the accounting year 1945-46 and hence, the income could not be said to have accrued or arisen per se in that accounting year. It was further observed that the right did not become vested in the assessee on the mere completion of the contract and it had to await creation by the review order. In support of the conclusion, the learned judges relied on the passage in E. D. Sassoon & Co. Ltd. v. Commissioner of Income-tax which has already been extracted.
Referring to the remarks of Rowlatt J. in the case of Isaac Holden & Sons Ltd v. Commissioner of Inland Revenue this is what the learned judges stated :
'It appears to us that it would be dangerous for us to apply the principles laid down by Rowlatt J. in that case to the case before us as that decision of Rowlatt J. was given on the provisions of the Excess Profits Duty Act as applicable in Britain and not on the provisions which are contained in the Indian Income-tax Act. We may, in this connection, refer to the principle laid down by the Supreme Court in Commissioner of Income-tax v. Vazir Sultan & Sons cautioning the courts in India when relying on decisions given in England. The Supreme Court held :
While considering the case-law it is necessary to bear in mind that the Indian Income-tax Act is not in pari materia with the British income-tax statutes, it is less elaborate in many ways, subject to fewer refinements and in arrangement and language in differs greatly from the provisions with which the courts in England have had to deal. Little help can therefore be gained by attempting to construe the Indian Income-tax Act in the light of decisions bearing upon the meaning of the income-tax legislation in England. But on analogous provisions, fundamental concepts and general principles unaffected by the specialities of the English income-tax statutes, English authorities may be useful guides.'
The learned judges referred to the special features of the British Excess Profits Duty Act and stated that it differed from the provisions of the Indian Income-tax Act.
We are of opinion that this decision of the Allahabad High Court is in consonance with the dictum laid down by the Supreme Court in E. D. Sassoon & Co. Ltd.s case. We, therefore, express our respectful assent to the principal adumbrated in the Allahabad case. This interpretation is in consonance with the spirit of section 4 of the Act XI of 1922, which is the predecessor of section 5 of the present Income-tax Act.
Applying the doctrine of E. D. Sassoon & Co. Ltd. as also of the Allahabad High Court, the only conclusion we can reach in the present case is that the claim of the assessee arose only in May, 1955. It is difficult to accede to the argument of Shri B. V. Subrahmanyam, learned counsel for the petitioners, that this income accrued in the year 1954 during which the contract between the proper Government and the assessee subsisted. Either on the basis of the Government order relied on by both the sides or the statement of the case or the order of the Income-tax Appellate Tribunal, it is difficult to predicate that the assessee had acquired a right to receive the sum of Rs. 44,000 in 1954. This claim for receipt of Rs. 44,000 arose only in May, 1955, when the Government agreed to pay sum of Rs. 2-6-0 per maund of rice, perhaps as representing driage, wastage, and fall in price of rice and paddy, etc. This is not one of the rights that flowed from the contract dated May 9, 1954. It is clear from the terms of the Government order that it is not in discharge of the rights and liabilities that flowed from the contract entered into between the parties in 1954 that the Government agreed to pay Rs. 2-6-0 per maund. Under that contract, the assessee had no right to get this sum of Rs. 2-6-0 per maund. The relevant terms and conditions of this agreement already extracted establish that the obligation arising from that document was to procure paddy under the voluntary procurement of Paddy and compulsory procurement of Paddy Schemes from the ryots, mill it and hold the stocks on behalf of the Government and deliver the rice on receipt of sums specified in the document. The right he had under that contract was to receive the payments at the rates specified therein for the rice. That did not contemplated the procuring agents, that is, the assessee, selling the stocks for his own benefit and at his own risk and receiving some compensation for any loss that might be sustained by him because of driage, wastage or fall in price or other incidental matters. This is a right which accrued to the assessee only in May, 1955. This is not one of the incidents of the contract of 1954.
That being the position, even the Madras case, Gajapathi Naidu v. Commissioner of Income-tax, does not help him, because in the Madras case the ex gratia payment was in relation to the supplies made in the year 1949. The situation is not similar here, since this claim is not in respect of the contract of any work done or of any supplies made in 1954. Even in the Madras case, it was pointed out that in order that the claim could be said to have accrued even before the claim was accepted or payment made, it should be regarded as a trade debt. So it does not come to the rescue of the assessee, since the right to receive Rs. 2-6-0 per maund could not be said to have vested in the assessee, or a debt created in his favour in 1954.
There is another circumstance which is very relevant in this behalf and that is that he himself treated the income as received in the accounting year corresponding to the assessment year 1956-57. In fact it was not his case either before the Income-tax Officer or before the Appellate Assistant Commissioner that this income could be included in the previous assessment year as having accrued or arisen in that year. He proceeded on the assumption that this was income earned by him in the accounting year 1955-56. It is only as an after-thought that before Income-tax Appellate Tribunal, for the first time, he raised this controversy.
We are firmly of the opinion that this sum of Rs. 44,000 was not earned in the accounting year 1955-56 or accrued or had arisen in that year and that it was properly included by the department in the assessment year 1956-57.
For these reasons, we answer the reference in favour of the department and against the assessee. The assessee will pay the costs of the department. Advocates fee Rs. 100.