M.R. Sharma, J.
1. M/s. Salig Ram Kanhaya Lal, Kotkapure, is a registered firm carrying on the business of commission agents in foodgrains. It is being described hereinafter as the assessee. During the accounting year ending March 31, 1965, the assessee has supplied some wheat to the District Food and Supplies Controller, Bhatinda, for which it received a sum of Rs. 2,72,281. In the balance-sheet for the period ending March 31, 1965, the assessee showed the cost of wheat as Rs. 2,80,911 and the amount received from the District Food and Supplies Controller was shown on the liabilities side under the account ' District Food and Supplies Controller'. Even though the assessee was maintaining accounts on the mercantile system of accounting, yet it did not claim any loss in the said transaction in the assessment year 1965-66. The assessee filed a civil suit in the Court of Senior Subordinate Judge, Bhatinda, claiming an extra amount of the Rs. 78,131: The suit was decreed for Rs. 78,131 on July 18, 1969, along with Rs. 4,159 as costs. The total decretal amount of Rs. 82,290 was entered by the assessee in its books of account as ' suspense account (Government litigation) ' during the accounting year 1970-71. This item was not entered in the books of account of the assessee during the accounting year 1969-70 relevant to the assessment year 1970-71. The assessee filed a return for the relevant assessment year on September 30, 1970, declaring its income at Rs. 46,250. The assessment was originally completed by the ITO on July 6, 1971, on a total income of Rs. 47,675. The revenue claims that the suspense account showing credit of Rs. 82,290 came to the notice of the ITO during the proceedings for the assessment year 1971-72 and, since this amount related to the earlier year, the ITO initiated proceedings under Section 147 of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), and issued a notice under Section 148 of the Act to the assessee on February 10, 1972. In response to this notice, the assessee filed a return reiterating its income to be Rs. 46,250 as had been shown in the earlier return. The assessee pleaded that, since the Government had filed an appeal against the judgment and decree of the learned senior sub-judge passed in its favour for Rs. 89,290, this amount was not liable to tax. The ITO did not accept this contention. He held that the assessee was maintaining its books of account on mercantile system of accounting and it became entitled to this amount when the decree was passed in its favour in July, 1969. He, therefore, treated this amount as revenue receipt and included it in the assessment completed on December 11, 1972, determining the total income at Rs. 1,29,865.
2. The assessee challenged this order of assessment in an appeal before the AAC on the ground that, since the decree had been challenged in appeal, the judgment had not become final and the decretal amount was not liable to be taxed in the year when the decree was passed. This contention prevailed with the appellate authority, who allowed the appeal filed by the assessee.
3. The ITO went in appeal before the Income-tax Appellate Tribunal, Chandigarh Bench, which was allowed. The Bench held that the taxability of an assessee's income was determined by the charging section which fully applied to t,he facts of the case. Under the mercantile system of accounting the taxability of the amount was not determined by the receipt of the amount and, under that system, the amount should have been credited in the books of account on accrual basis in the year when the decree was passed in favour of the assessee.
4. At the instance of the assessee, the Income-tax Appellate Tribunal has referred the following question of law for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right, in law, in holding that the sum of Rs. 82,290 was taxable as the assessee's income for the assessment year 1970-71 ?'
5. This dispute is, the subject-matter of Income-tax Reference No. 11 of 1976.
6. In proceedings under Section 148 of the Act, the ITO did not agree with the contention raised by the assessee and, vide his order dated December 11, 1972, he determined the total income of the assessee at Rs. 1,29,865 and reported the case to. the IAC, Bhatinda, who, in turn, imposed the penalty of Rs. 1,25,000, on the assessee on September 11, 1975.
7. The assessee went in appeal against this order. The Appellate Tribunal observed that the assessee had been showing the details of this transaction in its books of account right from the accounting year 1964-65, and even the expenses on civil suits were debited in the account books as and when incurred. While following the observations made in Regal Theatre v. CIT , it came to the conclusion that the assessee did not indulge in any concealment of facts with the intention of evading any tax in respect of any gains. On this basis, it allowed the appeal filed by the assessee and waived the penalty. At the instance of the Commissioner, the Appellate Tribunal has, in Income-tax Reference No. 74 of 1977, referred the following questions of law to us for our opinion:
' (i) Whether the Tribunal has been right in law in cancelling the penalty of Rs. 1,25,000?
(ii) Whether the Tribunal has been right in law in holding that where the Explanation to section 271(1)(c) is applicable, only minimum penalty, as prescribed under section 271(1)(c), is imposable and when theconduct of the assessee was analysed the fiction of the Explanation could not be made to play any role against the assessee ?'
8. Since the aforesaid two references, namely, Income-tax Reference No. 11 of 1976, and Income-tax Reference No. 74 of 1977, involve common questions of law and fact, they are being disposed of by one judgment.
9. Now, from the point of view of a layman, the facts giving rise to the controversy are that the assessee was called upon by a department of the State Govt, to supply a particular quantity of wheat within a specific period. The department concerned did not lift the entire quantity of wheat during the stipulated period. The assessee was made to supply the balance quantity of wheat at a time when the prices of wheat had risen in the open market. It represented that it should be paid on the basis of the market value of the wheat which was supplied during the extended period. This representation was turned down and the assessee had to enter into litigation with the State Govt. to get its dues which were granted to it by the Senior Sub-Judge in a suit. Since the State Govt. had filed an appeal against the judgment of the Senior Subordinate Judge decreeing the claim of the assessee, it kept the receipts and expenditure relating to this transaction in a suspense account. For this default, it was burdened with the liability to pay additional tax on the basis of the fiction that it could be deemed to have received the amount on the date when the claim was originally decreed in its favour. Not only that, it was also burdened with a penalty of Rs. 1,25,000 because it did not mention the decretal amount in the return for the earlier period even though it had indicated the same in the balance-sheet which was produced before the I.T. authorities. Luckily for it, the Income-tax Appellate Tribunal waived the penalty but nevertheless it substantially increased its tax burden.
10. On these facts, it was argued by Mr. Bhagirath Dass that since the State Govt. had filed an appeal against the decree of the learned Senior Subordinate Judge and an appeal can be treated in law as a continuation of the suit, the assessee could not be deemed to have received this amount during the year when the decree in respect of it had been passed in its favour. In support of his contention, the learned counsel relied upon the following observations made by Mahajan J. in a Division Bench judgment of this court in CIT v. Jai Parkash Om Parkash Co. Ltd. :
' No amount can be said to accrue unless it is actually due. Claim toan amount is not tantamount to the amount being due or in other wordsthat the amount has accrued. In the instant case, the very foundation ofthe claim is in jeopardy. If the appeal goes against the assessee, thennothing would be due.'
11. The learned counsel also argued that, in the peculiar circumstances of this case, the fact that the assessee adopted the mercantile system of accounting did not make the least bit of difference and the decretal amount could be regarded as a receipt of the assessee for the purpose of income-tax only during the year when the amount was realised by it. The other submission made was that in applying the provisions contained in the Act, the court should always keep in mind that such an interpretation is not placed on the provisions of the Act which tend to infringe upon the fundamental rights of a citizen. In elaboration of this point, the learned counsel submitted that if the claim for damages in respect of a trading transaction was decreed in favour of an assessee and he is called upon to pay tax on the assumption that the amount decreed should be deemed to have been received by him on the date of decree, the revenue would be able to deprive him of a substantial sum in the form of income-tax even though that decree is subsequently modified or reversed. In that case, the learned counsel submitted, an assessee would be made to pay tax even though in fact no income had accrued to him. According to him, this anomaly could be rectified if it is held that the amount accrued to the assessee under a decree only when it was affirmed or modified by the final court, or the period for filing an appeal against the decree of the trial court had expired and no appeal had been filed.
12. On the other hand, Mr. Awasthy, the learned counsel for the revenue, submitted that under Section 145 of the Act, income had to be computed in accordance with the method of accounting regularly employed by the assessee and in cases wherein the mercantile system of accounting had been adopted income would be deemed to have been earned in respect of a trading account when the same had been decreed by the trial court. According to him, the date of receipt of money by the assessee was wholly irrelevant for determining when the income accrued. In support of this submission, the learned counsel relied upon E. D. Sassoon & Company Ltd. v. CIT : 26ITR27(SC) , CIT v. Ashokbhai Chimanbhai : 56ITR42(SC) and Kedarnath Jute Mfg. Co. Ltd. v. CIT : 82ITR363(SC) . When questioned about the loss accruing to the assessee on account of the subsequent reversal of the decree, the learned counsel replied that the assessee could claim a trading loss in the year when the decree was reversed, and if the business had been discontinued by that time the assessee could have no remedy at all and his case would be akin to that of another businessman who happens to lose his capital on account of his mismanagement or some other providential act which is commonly known as vis major.
13. After giving our careful consideration to the arguments advanced at the Bar, we are of the view that none of the extreme positions canvassed by the learned counsel for/the parties can be taken as correct.
14. Section 145 of the Act recognises the right of a trader to adopt either one or the other system of accounting. There are times when some peculiar business transactions which do not admit of one or the other form, of accounting. In such a situation, the assessing authority has to look at the substance of the situation and to decide the matter in such a manner that neither the revenue is put to some unreasonable loss nor the assessee is subjected to any unreasonable hardship. As noticed earlier, in the year in which the assessee supplied wheat to the department of the State Govt., it did reflect this transaction in its account books, and in the income-tax returns for the relevant year it did not claim any loss in respect of the cash equivalent of the wheat supplied to the State Govt. Even when the State Govt. paid the price of wheat, the amount was set apart in a separate account. When the assessee succeeded in getting a decree for the additional amount executed, it did indicate having received this amount in the corresponding assessment year. Since the State Govt. had gone in appeal, the very fact of accrual had gone into a state of flux. In the peculiar circumstances of this case, the' decretal amount could not have been deemed to have accrued to the assessee in the assessment year in which the decree was passed. However, when the decretal amount reached the pocket of the assessee the question of accrual became otiose because the liability to pay tax would at once arise as soon as the amount was received by it. The case would have been entirely different if the assessee had on account of supply of wheat to the State Govt. and non-receipt of its price during the relevant year had claimed a trading loss on the basis of the system of accounting which it had adopted, for, in that case, it could not have been allowed to take a contrary position.
15. Mr. Awasthy, had submitted that Jai Parkash Om Parkash's case has been set aside.by the Supreme Court in CIT v. Jai Parkash Om Parkash Co. Ltd. : 52ITR23(SC) . However, the true facts are that a Division Bench of this court had declined to issue a direction to the Tribunal to state the case and the Supreme Court reversed the judgment on this point. The observations made by the Division Bench about the accrual of the income were not expressly overruled. It suffices to mention that where a point of law arises and the Tribunal refuses to state the case, the High Court when approached is under an obligation to issue a direction to the Tribunal to state the case even if it is not satisfied about the merits of the point of law involved. There is, however, one exception to this principle. If the point of law has been finally set at rest by the highest court of the land, the High Court need not issue a direction.
16. Mr. Awasthy, then referred to CIT v. Dr. Sham Lal Narula . In that case, the assessee's land was acquired by the State Govt. and he had been paid interest on the amount of compensation amounting to Rs. 48,660 in the previous year relevant to the assessment year 1956-57. The assessee's contention that the entire amount could not be assessed in the year 1956-57 did not find favour with the ITO or the AAC. The Appellate Tribunal, however, held that the interest to the tune of Rs. 42,577.50, being interest for the earlier accounting years, accrued in the previous year ending on March 31, 1955, and for that reason could not be included in the assessment year 1956-57. The view taken by the Tribunal was upheld by a Division Bench of this court on the ground that the yearly interest accrued under the provisions of a statute and became income in the relevant assessment years. This case is, therefore, clearly distinguishable on facts.
17. As noticed earlier, the amount was actually received by the assessee during the assessment year 1971-72 and before that period its claim was in a state of flux because of the challenge in appeal against the decree passed by the learned trial court. We are, therefore, of the opinion that the Tribunal was not right in holding that the amount under the decree in the circumstances of this case accrued to the assessee on the date when the decree was passed in its favour. We, therefore, answer the question referred to us in Reference No. 11 of 1976 in favour of the assessee and against the revenue.
18. In view of the aforementioned decision, the questions referred to us in I.T.R. No. 74 to 1977 do not call for any reply. The case shall now go back to the Tribunal for decision in the light of the opinion given by us. The parties are left to bear their own costs.
B.S. Dhillon, J.
19. I agree.