MANCHADA J. - This is a case stated under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the Act). The question referred is :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 32,218 was assessable to tax in the assessment year 1957-58 ?'
The material facts are these : The assessee is registered firm dealing in iron goods and also runs a steel rolling mill. The relevant assessment year is 1957-58, the previous year being the year ended 3rd February 1957. During the relevant year, the assessee received a sum of Rs. 32,218 from the Government on an account of difference in the price of goods supplied by the assessee to permit-holders in the accounting periods relevant assessment year 1943-44 onwards. The suppliers were made during the war years when the price of iron and steel goods were controlled and the assessee was obliged to sell his goods at prices fixed by the Iron and Steel Controller. However, it seems, the Iron and Steel Controller recognised that before the control orders came into force persons in the trade like assessee might have purchased raw materials at higher rates and by a letter dated February 27, 1943, all the members of the Steel Rolling Mills Association were assured of reimbursement to the extent of the difference between the actual price paid by re-rollers and price fixed by the Government for purchase of the raw materials. The relevant portion of this letter reads :
'In modification of paragraphs 2and 3 of my letter of January 30, 1943, you will receive the difference between your cost according to the Delhi agreement as shown in that paragraph plus to cost of shipment of the finished materials from your works to the destination (where the sale is f.o.r that station) or to the dispatching station and the rate at which the material is sold.'
This is signed by one 'A. C. Gupta, Price And Account officer for Iron and Steel Controller'. After a period of nearly 14 years since the aforesaid letter was issued for the Iron and Steel Controller the 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, as claimed by the assessee in the statements prescribed for the purpose. The department rejected the assessees contention that the receipt was of a casual nature and did not represent business income and also that the amount received did not fall to be assessed in the year of receipt. The departmental officers is coming to this conclusion relied upon the decision of the Tribunal in respect of the assessment years 1950-51 and 1951-52, during which years also similar payments had been received by the assessee. In these years the Tribunal had held : (a) that the amount received was not of a casual nature, and (2) that it was assessable in 1950-51 and 1951-51, the years in which the amount was actually received. Against the order of the Tribunal for those assessment years the assessee took the matter to the High Court under section 66(1), but the only question raised was, whether the amounts received represented income or capital receipts and by its judgment in Income-tax Reference No. 76 of 1958, dated 7th August, 1962, the High Court answered the question against the assessee. The assessee would, therefore, appear to have accepted the position in those years that the receipt fell to be taxed in the year when received and not on accrual basis when supplies were effected during the war years.
In the relevant assessment year, however, the assessee has thought fit to rake up the question on which it had accepted and acquiesced in the decisions with regard to 1950-51 and 1951-52. It was contended that the amount received in the assessment year 1957-58 was assessable on accrual basis during the war years when the goods were actually supplied. Reliance for this proposition was placed on the decision of the Madras High Court in A. Gajapathy Naidu v. Commissioner of Income-tax. In that case, it was held that 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. This was distinguished and the Tribunal further rejected the assessees contention holding that the amount could be taxed only in the year in which the compensation due to assessee was quantified, as before that date the assessee had no right to receive it. Hence, this reference at the instance of the assessee.
At the outset, it may be stated that the said decision of the Madras High Court, on which the claim was resuscitated, inspite of its having been abandoned after the decision of the Tribunal in respect of the appeals for the assessment years 1950-51 and 1951-52, has since been overruled by the Supreme Court in Commissioner of Income-tax v. A. Gajapathi Naidu. In that case, the Supreme Court approved the view of this court in Commissioner of Income-tax v. Kalicharan Jagannath. In the latter case it was held :
'Even though the amount was payable because the assessee had carried out the contract in the accounting year 1945-46 in accordance with the agreement entered into in that year, the mere execution of the agreement and performance of the contract in that year did not entitle the assessee to receive compensation. The right to receive payment of the additional sum arose later when the review application filed by the assessee under the terms of the agreement was accepted.'
The decision on which reliance was placed having since been overruled, the bottom has fallen out of the case of the assessee.
Nevertheless, undaunted, Mr. Jagdish Swarup for the assessee went on to press the claim of the assessee on the basis of the aforesaid letter from the Iron and Steel Controller dated the 27th February, 1943. According to him, this letter constituted a contract between the parties and, therefore, the right to compensation accrued as and when each supply was made during the war years. There is no force in the contention. The said letter, at best, is only an assurance which cannot amount to a contract between the assessee and the Government of India. Under the Government of India Act such a contract required to be executed in a particular manner and the mere writing of a letter by some accounts officer from the Iron and Steel Controller will not make it an agreement and much less a contract. Admittedly, such a letter would not have enabled the assessee to file a suit and claim any amount as compensation due. It is well-settled that, income only accrues when a person has acquired a right to receive it, i.e., he must have created a debt in his favour which may be payable later, i.e., debitum in praesenti solvendom in futuro. It was so laid down by the Supreme Court in E. D. Sassoon & Co. v. Commissioner of Income-tax. In the present case, there was certainly no debt created in favour of the assessee during the war years and, therefore, there is no question of any payment having been made later in respect thereof. As already observed, the Steel Controller had, at best, in mind certain principles on the basis of which he hoped to give the iron and steel rolling mills some relief for the loss or reduction in profits as a result of the enforcement of controls. The assessee also had correctly understood the position that there was really no agreement or contract much less a debt created in his favour. Otherwise, its system of accounting being mercantile, it would most certainly have raised suitable entries in its accounts. Having tried to raise such a point in the assessment year 1950-51 and 1951-52 and having failed before the Tribunal it accepted the position that there was no accrual in the years when the goods were supplied but only in the year when the claim was quantified and payment received.
The ruling relied upon by the learned counsel for the assessee in Commissioner of Income-tax v. K. R. M. T. Thiagaraja Chetty, has no application. That was a case where the assessee firm was a managing agent of a limited company. Under the managing agency agreement, the assessee was entitled to a certain monthly remuneration of commission of 10% on the net profits of the company and a small percentage on the sales and purchases. During the year of account ending 31st March, 1942, the assessee became entitled to a commission of Rs. 2,26,850. The Income-tax authorities held that the assessee followed the mercantile method of accounting and not the cash basis and that the commission having accrued became assessable, whether received or not. The Appellate Tribunal reversed this finding but on appeal the High Court came to the conclusion that there was no material for the Tribunals finding that the assessee was being assessed on cash basis. It is, therefore, not possible for the assessee to derive any benefit from this case.
For the reasons given above, the question referred is answered in the affirmative and against the assessee. The assessee will pay the costs of this reference which we assess at Rs. 250. Counsels fee is also assessed at Rs. 250.
Question answered in the affirmative.