1. This is a departmental appeal directed against the Commissioner (Appeals), Calicut's order dated 20-12-1982 and it relates to the assessment year 1978-79. The only question involved in this appeal is whether the amount of Rs. 41,86,349 which was credited as the price of medicines supplied to the Government which the Government of Kerala did not accept should be treated as part of the trading receipts of the assessee.
2. The assessee is a company in which the public are substantially interested and it is a subsidiary of the Kerala State Industrial Enterprises Ltd., Trivandrum. It is engaged in the manufacture and sale of pharmaceutical products. We are concerned with the assessment year 1978-79 for which the previous year is the financial year ended on 31-3-1978. Receipt of Rs. 41,86,349 which was taken credit for in the accounts of the assessee as amount receivable from the Government of Kerala on the basis of the recommendation of the Bureau of Industrial Costs and Prices was treated as part of the total receipts derived by the assessee on the ground that the assessee is following the mercantile system of accounting and the credit once taken cannot be excluded on a reconsideration of finalised accounts. However, the ITO observed in his assessment orders that the claim will be examined in the previous year when the Government finally turned down the assessee's claim. Thus, by means of his assessment orders dated 17-4-1982 passed under Section 143(3), read with Section 144B, of the Income-tax Act, 1961 ('the Act') the amount of Rs. 41,86,349 is taken as part of the total of receipts of the assessee.
3. Against the assessment, thus framed by the ITO, the assessee went in appeal before the Commissioner (Appeals). It was contended that the amount of Rs. 41,86,349 had been taken credit for only on the basis of a claim preferred to the Government of Kerala. It was already intimated in a note that the Government had not admitted the claim of the assessee. Since the claim of the assessee had already been rejected by the Government the entry made in the accounts has become erroneous.
Even in commercial accounting the claim represents only a contingent asset and will become income in the year in which it actually becomes due. In this case since the claim had never been admitted by the Government the question of accrual of income at any point of time does not arise at all. The learned Commissioner (Appeals) held in the impugned order that a mere claim cannot clothe the expectation with the character of income. The treatment given by the assessee in his accounts in regard to the receipt of payment is also not conclusive about its real character. He further held that on a consideration of genesis of the claim and its ultimate destiny it would clearly show that at no point of time the amount claimed by the appellant as receivable from the Government of Kerala had become its income within the meaning of that expression under the Act. Therefore, he directed that the amount of Rs. 41,86,349 should have been excluded from the total income of the assessee for the assessment year 1978-79. He specifically refrained himself from expressing his opinion if at all it should be considered as income whether it should relate to the assessment years 1974-75 and 1975-76 as the learned Commissioner (Appeals) felt that he was not concerned with that question for the reason that he had held that it was only a mere claim and it cannot constitute income.
4. As against this impugned order the revenue came up in second appeal before this Tribunal. It is urged in the grounds that the Commissioner (Appeals) erred in deleting the amount of Rs. 41,86,349 as it was credited by the assessee in the profit and loss account and it was approved by the general body of the assessee-company. The impugned order was assailed saying that on the one hand the learned Commissioner (Appeals) opines that the claim was made according to the GO. Rt. No.34 dated 10-10-1975 and on the other hand he gives a finding that the claim was a unilateral claim made by the assessee and income had not accrued to the assessee. The impugned order was also assailed on the ground that the learned Commissioner (Appeals) erred in holding that because the State Government later refused to accept the additional price the amount had not accrued to the assessee. Another ground taken was that the Commissioner (Appeals) erred in holding that the Central subsidy received by the assessee should not be reduced from the cost of the assets as provided in Section 43(7) of the Act in order to determine the actual cost to the assessee of the assets for the purposes of calculating depreciation.
5. Thus, it can be seen that there are two grounds which are to be disposed of in this second appeal. We have heard Shri M.M. Cherian, the learned departmental representative and Shri Venugopal C. Govind, the learned counsel for the assessee. The facts relating to the first point are, as can be seen from the GO. Rt. No. 2896/75/HD dated 10-10-1975 issued by the Health (C) Department, a copy of which is furnished to us on behalf of the assessee-company during the course of the assessee's business it used to supply medicines manufactured by them to the Health Services Department of the Government of Kerala. The practice of settling accounts between the Government of Kerala on the one hand and the assessee-company on the other appears to be as follows.
6. The Kerala Government used to sanction advances to the assessee-company with a view that it should be adjusted against the supply of medicines made by them to the Health Services Department.
Each advance should be sanctioned only after adjusting the previous advance in full. By his letter dated 1-3-1975 the Director of Health Services addressed to the Government of Kerala and pointed out that the adjustment of advances already sanctioned could not be made because the prices of items manufactured by the assessee-company have not been fixed by the Government of India, Ministry of Petroleum and Chemicals since they were the statutory authority to fix the prices of such medicines as per the provisions contained in Drugs (Price Control) Order, 1970 and pending price fixation by the Government of India, the Health Services Department of Kerala is not in a position to make final adjustment of the advances sanctioned and therefore the Director of Health Services recommended to the Government of Kerala not to sanction further advances to the assessee-company. Against the said recommendation it was represented to the Government of Kerala on behalf of the assessee-company that it was placed in a difficult financial position firstly because its production was in full swing at that time and secondly because the position worsened with the credit squeeze observed by the Government of Kerala as without cash payment the assessee-company was not in a position to get raw materials in time and unless the procedure is streamlined the production schedule of the assessee-company would be adversely affected. When the comments of the Director of Health Services were called for on the representation made by the assessee-company as above the Director of Health Services suggested that the advances already paid may be adjusted on the basis of tentative price list approved by the assessee-company and further advances may be sanctioned so as to enable them to continue further production. He suggested that the chairman of the assessee-company should also execute an indemnity bond to the effect that if the price structure fixed by the Government of India is lower than the rate now fixed by the assessee-company, excess payment will be adjusted against future supplies and if on the contrary the assessee-company will have to prefer the claim, accordingly. The Government of Kerala having considered both the representation made on behalf of the assessee-company and the recommendation made by the Director of Health Services on the said representation and after examining the proposal made by the Director of Health Services in detail passed GO. Rt. No.2896/75/HD dated 10-10-1975 [Health (C) Department] as follows : In view of the urgent need for an uninterrupted supplies of essential drugs to the Health Services Department and also in view of the company's need for finance, the proposal of the Director of Health Services to make interim adjustments and to make further advances is accepted.
As can be seen from the above, the adjustment of advances already made prior to 10-10-1975 were made on the basis of tentative price list approved by the assessee-company but "subject always to the conditions that if the price structure fixed by the Government of India is lower than the rate now fixed by the assessee-company, excess will be adjusted against future supplies. So also is the case with the further advances made by the Government of Kerala to the assessee-company after 10-10-1975. This arrangement is evidenced by a contract in the shape of an indemnity bond executed by the assessee-company in favour of the Government of Kerala.
7. Therefore, in the face of the above stipulations and the contract between the assessee-company and the Government of Kerala, we have no hesitation to come to the conclusion that the price of drugs supplied to the Health Services Department of the Government of Kerala by the assessee-company was fixed only tentatively and it was always subject to the ultimate fixation of price by the Government of India.
Therefore, we have to hold that the amount thus initially charged does not represent the correct price of the drugs supplied by the assessee-company but it represented only a tentative claim made as the price of the drugs supplied. A mere claim made cannot be equated with the incurring of a liability or a receipt.
8. In this connection, the decision of the Supreme Court is relevant, i.e., CIT v. Shoorji Vallabhdas & Co.  46 ITR 144 in which it is held as follows : Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise.
Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. (p. 144) The assessee in that case was a firm of three partners and they were managing agents, inter alia, to Malabar Steamship Co. Ltd. and New Dholera Steamships Ltd. It had entered into managing agency agreement with the above two companies under which it had to receive 10 per cent of freight charged as its commission. For the period 1-4-1947 and 31-12-1947 at the rate of 10 per cent of the freight the assessee-company was entitled to Rs. 1,71,885 from Malabar Steamships Co. Ltd. and Rs. 2,56,815 from New Dholera Steamships Ltd. and these amounts were credited in the books of account of the assessee-firm and correspondingly debited to the ship companies named above. In 1947, two private limited companies were floated and the assessee-firm desired to substitute these two companies as the martaging agents of the two companies referred to above and it desired to resign from the managing agency on 20-11-1947. Two shareholders of the Malabar Steamships Co.
Ltd. objected to the rate of commission and they proposed that either the commission should be 10 per cent of the profits of the managed company or two and a half per cent of the freight received . On 30-12-1947 extraordinary general meetings of the two managed companies were held and the two private limited companies floated by the assessee were appointed managing agents from 1-1-1948. In the said general meetings the commission was reduced from 10 per cent of the freight to two and a half per cent, consequently the assessee-firm had to give up 75 per cent of its earnings during the relevant years of account amounting to Rs. 1,36,903 from Malabar Steamship Co. Ltd. and Rs. 2,00,625 from. New Dholera Steamships Ltd. The question that came up for consideration was whether the above said two sums are income of the previous year ending 31-3-1948. Principally two arguments were advanced on behalf of the revenue, (1) The income had already accrued to the assessee-firm in the year of account and the arrangement amounted to a voluntary gift by the assessee-firm to the shipping companies and the books being kept on mercantile basis showed the commission as each amount of freight was entered. (2) The managed companies dealt with the accounts only in December 1948, long after the previous year was over, and that what had happened in the subsequent year did not alter the position in the relevant previous year. In the light of these facts as well as the arguments the Hon'ble Supreme Court laid down the ratio which is already extracted above.
9. The above case is an extreme case whereas in the case before us according to the ratio of the Supreme Court the income cannot be said to have resulted at all nor was there any accrual or receipt of income.
10. A case nearer to the facts of our case can be found in the decision of the Gujarat High Court in CIT v. Western India Engg. Co.  81 ITR 712. The assessee was doing business of building contracts in that case. It had taken up both tender work and non-tender work. As far as non-tender work, i.e., additional work not included in the tenders for which the rates had not been settled, the assessee would submit bills for such extra work and the rates mentioned in such bills would be pitched a little high, in view of past experience that the claim would be subjected for deductions at the time of settlement of the bills. The assessee would credit the amounts of the bills for non-tender work in his works account, but would transfer to his profit and loss account only such amounts as he is expected to receive and would retain the difference in the works account as kasar. For the assessment year 1962-63 the kasar amount of Rs. 26,000 was not allowed by the department to be deducted. The Tribunal took the view that the bills submitted by "the assessee in regard to the non-tender items of work done by it did not necessarily represent its claim legally enforceable against its clients and, therefore, the disputed amount of kasar could not be taken as representing the real income of the assessee earned by it during accounting period. The Gujarat High Court held as follows: ...The accrual of the amount would justify the assessee in crediting the same in his account books. If he does so, then the evidence of that credit entry would, in ordinary circumstances, be considered as sufficient evidence to show that the assessee concerned has earned that amount. However, mere posting of an entry in the account books of the assessee would not always supply a conclusive nature of evidence on the question whether the disputed amount has accrued to the assessee or not. If there are other facts going to throw light on the question, whether the amount has really accrued to the assessee or not then the posting of a credit entry in the account books of the assessee should be appreciated in the light of that evidence. If that is so, the mere fact that a mercantile system of accounting is adopted by an assessee would not conclude the matter.
Each case should be decided on its own peculiar facts and, if these facts reveal that even though the amount in question is credited in the account books of the assessee, the amount had in fact not accrued to him, then it would be open to the assessing authorities to come to the conclusion that, in spite of the adoption of the mercantile system of accounting, the amount has not accrued to the assessee.... (p. 720) Therefore, when the price of the drugs supplied by the assessee-company to the Health Services Department was only tentative but not fixed by contract or otherwise the entries made in accounts represent only mere claims. They do not represent any accrued income or income received.
Therefore, the impugned order of the Commissioner (Appeals) is quite justified and we hold that the amount of Rs. 4,86,349 is rightly deleted.
11. As regards the second ground it is covered by the Madras Special Bench decision in Pioneer Match Works v. ITO  1 SOT 331 where it is held that the Central subsidy amount cannot go to reduce the real cost of plant and machinery for the purpose of granting depreciation.
Hence we are unable to find any merit in the departmental appeal and hence it is dismissed.