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A. Gajapathi Naidu Vs. the Commissioner of Income-tax, Madras - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberCase Referred No. 87 of 1955
Reported inAIR1961Mad14; [1960]40ITR282(Mad); (1961)1MLJ48
ActsIncome Tax Act, 1922 - Sections 4 and 10
AppellantA. Gajapathi Naidu
RespondentThe Commissioner of Income-tax, Madras
Appellant AdvocateP.R. Ranganathan, Adv.
Respondent AdvocateC.S. Rama Rao Sahib, Adv.
Cases ReferredSenthilkumara Nadar and Sons v. Commissioner
direct taxation - assessment - sections 4 and 10 of income tax act, 1922 - whether sum of rs. 12447 assessable to income-tax and it has been rightly assessed in assessment year 1951-52 - amount of rs. 12447 paid expressly for loss incurred in connection with supply of bread during year 1948-49 - receipt would be analogous to trading receipt of year 1948-49 - account could be reopened for purpose of assessment - being receipt of earlier year such amount could not be included in assessment for year 1951-52 - held, amount assessable for year 1948-49 in assessment year 1949-50 by reopening account - court answered question against assessee. - - healso takes contracts for the supply of bread or otherprovisions to institutions like a hospital. an appeal to the appellate assistant.....ramachandra iyer, j. 1. the following questions have been referred under section 66(1) of the indian income-tax act: '1. whether the sum of rs. 12,447 is assessable to income-tax? 2. if so, whether it has been rightly assessed inthe assessment year 1951-52?'the assessee owns a bakery and a provisionshop and he runs also a restaurant. healso takes contracts for the supply of bread or otherprovisions to institutions like a hospital. the assessee's year of account ends with the financial year,namely, 31st of march. during the year of accountending with 31-3-1949 (corresponding assessmentyear being 1949-50) the assessee entered into a contract with the government for the supply of breadto the stanly hospital, madras, at certain rates.those rates were, however, found to be uneconomical......

Ramachandra Iyer, J.

1. The following questions have been referred under Section 66(1) of the Indian Income-tax Act:

'1. Whether the sum of Rs. 12,447 is assessable to income-tax?

2. If so, whether it has been rightly assessed inthe assessment year 1951-52?'The assessee owns a bakery and a provisionshop and he runs also a restaurant. Healso takes contracts for the supply of bread or otherprovisions to institutions like a hospital. The assessee's year of account ends with the financial year,namely, 31st of March. During the year of accountending with 31-3-1949 (corresponding assessmentyear being 1949-50) the assessee entered into a contract with the Government for the supply of breadto the Stanly Hospital, Madras, at certain rates.Those rates were, however, found to be uneconomical. Representations were made to the Government, it is said, after the close of the year for relieving the contractor from, the loss sustained in thesupply of bread.

The Government acceded to the request and passed G. O. No. Mis. 4005 Home, dated 24-11-1950, directing payment of compensation for the loss sustained by the contractor, in the supply of bread in the year 1948-49. The assessee submitted a bill on 27-12-1950, and received a payment of Rs. 12,447 during the year of account, corresponding to the year of assessment 1951-52. In the assessment of the Income-tax for that year, namely, 1951-52, the officer included the sum of Rs. 12,447. The assessee contested the inclusion on two grounds, (1) that it was in tile nature of a wind fall, and (2) that it being a receipt in respect of a contract performed in the year relating to the assessment year 1949-50, it could not be included in the assessment for the year 1951-52. The contentions were overruled, and the amount was brought to tax. An appeal to the Appellate Assistant Commissioner and a further appeal to the Tribunal met with no success.

2. The first question, which relates to the contention that the receipt was of a casual nature, presents little difficulty. The payment was, no doubt, an act of grace on the part of the Government, but it was directly related to the business of the assessee; the receipt by the assessee would be one arising out of his business. The G. O. purported to increase the rate originally agreed to, and the excess on the basis of the increased rates was paid to the assessee. Further, the assessee was actually doing the same business in the year of account. The receipt will be a trade receipt, and will be liable to tax.

3. But the more important question is the next one, namely, whether that amount can be included for the assessment in the year 1951-52. The assessee maintained his accounts on the mercantile basis. Under that system, profits or gains are treated as arising or accruing on the date of the transaction, notwithstanding the fact that they are not received or deemed to be received, the book profits being taken for the purpose of assessment to tax.

For ascertaining such profits, sums which were due to the business are entered on the credit side of the account immediately they are due, and before they are actually received. Similarly, the expenses are entered the moment the legal liability to pay arises, and before the actuals disbursement. The income made, therefore, accrues to an assessee under that system without its actual receipt, because it can be said to accrue to him once the assessee acquires a right to receive it, though it may be received later. In Sassou and Co. Ltd, v. Commissioner of Income-tax, : [1954]26ITR27(SC) the Supreme Court, considering the scope of an accrued income, observed at p. 51 (of ITR) : (at p. 482 of AIR).

'It is clear, therefore, that income may accrue to an assessee without toe actual receipt of the same. If the assessee acquires 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 must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in presenti solrendur 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.'

The mercantile system of accounting, under which what is legally due is brought into credit, whether it be received or not, and what Is payable, that is, that to which a legal liability attaches is brought into the debit side, whether, paid or not, has been explained in the decision of the Supreme Court in Keshav Mills Ltd. v. Commr. of Income-tax, : [1953]23ITR230(SC) . The observations of tile Supreme Court extracted above establish that, in the mercantile system of accounting, an income could be said to be accrued, even though it had not been ascertained on the date of the transaction, the requirement for the accrual being the right existing in the person at the time.

4. In the present case, the only right of the assessee on the date, when he supplied the bread, was to debit the Government the contract rate. He was entitled to nothing further. The G. O. which raised the rates, came into existence long after; payment thereunder was ex gratia, and not on the basis of a right. Therefore, the amount of Rs. 12,447 was not, and indeed could not have been debited in the books of the assessee for the year, when the supply of bread was made to the hospital, namely, 1948-49. These accounts have been closed.

5. It, therefore, becomes a matter for consideration whether, on principles of accounting, the receipt, which undoubtedly relates to the transactions of 1948-49, shall be treated as a receipt in the year of its actual receipt where there was no transaction, out of which it could be said to have accrued, or whether the accounts of 1948-49 should be reopened and the receipt added to the book results therein. The reopening of accounts in such cases is not under any of the familiar legal grounds, on which closed accounts are reopened, e.g., mistake, fraud etc. None of these elements are present here.

The account correctly represented the position when it was made up. Something has happened subsequently, which shows that what was shown as income then was really more. The normal rule in the mercantile system of accounts is that the receipts are to be brought into account in the year of its acctual. The basis of accrual is, as we pointed out, the existence of a legal right or title to the amount. If such a right arises afterwards, does it relate back to the year of the transaction, to which the subsequent receipt relates?' It so, can the closed accounts of the year of the transaction, be reopened? If the accounts could be reopened, the subsequently ascertained amount, (e.g. the price as subsequently fixed) will have to be inserted in the place of the original amount, and the resultant profit would be liable to tax for that year. It is, therefore, necessary to examine in what cases the accounts can be reopened.

6. In Simon's Income-tax, 2nd Volume, 2nd Edn. in Article 179 at page 158, the general rule as to the reopening of the accounts is stated thus :

'In certain circumstances a profit and loss account which has been accepted as the basis of the assessment for a past year pf assessment may in effect be reopened at a subsequent date. The effect of such a procedure is that, if an addition is made to the profit shown by the account, an additional assessment for the relevant tax year can be made; while if the effect of the reopening of the account is to re-duce the amount of profit there shown, it may be possible to maintain a claim in respect of error or mistake, and in that way obtain a repayment of tax in respect of the relevant tax year...... The principle to be applied is to ascertain whether the right or liability in question was established in the past accounting period, leaving the final amount of the item still to be calculated, or whether the right or liability did not arise until, a later period.'

As the illustrative, cases mentioned by the learned author would show, the right or liability, the existence of which in the past is a prerequisite for the jurisdiction to reopen, may be one which exists or is deemed to have existed. A simple case is one, in which a receipt can be added to the profit and loss account of the past period if title to that sum arose in that period, notwithstanding the fact that the precise amount was not ascertained till a later period.

7. In the Commrs. of Inland Revenue v. Newcastle :Breweries Ltd., (1927) 12 Tax Cas 927, the assessee carried on the business of brewers and Wine, and in the course of their business, kept large stocks of rum which was reduced and blended before sale. A portion of the assessee's stock 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. Litigation, followed in regard to the actual amount due, and pending the litigation, legislation was passed, providing for a method of compensation in similar cases. The amount due was not ascertained.

In November 1921, a sum of money was paid to the assessee, 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 30-10-1918, in which the rum was taken over, as it was attributable to the requisition in that year, though the amount was ascertained later. Warrington L. J. observed at p. 948 thus :

'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 which was paid on account would, in my opinion, be properly dealt with in ascertaining the profits for the accounting period.'

In an ordinary case of sale of goods between two parties, the price is agreed upon between the parties, though it may be that in certain cases the actual amount has to be ascertained later. In the case cited above, there was no such agreement. The assessee was, however, entitled to receive the proper price for the goods taken over by the Government which could be said to have accrued or was earned on the date of the requisition. The transaction was treated as a commercial transaction. The amount ultimately ascertained was deemed to have become payable, even when the goods were taken over.

8. In Commissioners of Inland Revenue v. Gardner Mountain and D' Ambrumenil Ltd., (1947) 29 Tax Cas 69, the underwriting commission was earned in a year; under the agreement the commission was to be settled and it became payable only two years thereafter. On the question, in which year the income by way of commission accrued, it was held that the accrual was on the date of the transaction, although the ascertainment of the amount was postponed by two years and it was only when it could be known what the amount was. But that circumstance could not take away the character of the amount that was ultimately paid as one towards a trade debt.

9. The principle underlying these cases is not so much one of law as to reopening of closed accounts, but of a sound commercial system of accounting, whereby, if a transaction takes place, all that has accrued in respect of it (is ?) on the date of the transaction itself. If, for instance, there had been a sale of goods, the entire price, having been earned by virtue of that sale, should be credited as on that date; if the price is riot ascertainable till after the close of the year, the accounts are reopened for the purpose. This aspect of the matter is summed up by Lord President Cooper in James Soenoer and Co. v. Commissioner of Inland Revenue, (1952) 32 Tax Cas 111 :

'From an examination of the numerous cases conveniently summarised in Simon on Income-tax II, 128, 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 the 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 New Castle Breweries, (1927) 12 Tax Cas 927 and Isaac Holden and Sons v. Commrs. of Inland Revenue, (1924) 12 Tax Cas 768, 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 (1927) 12 Tax Cas 927 and Bernhard v. Commrs. of Inland Revenue, (1928) 13 Tax Cas 723. In (1928) 13 Tax Cas 723 , Lord Hansworth M. R. put the matter thus: 'If there is a liability which is subsequently determined but which, is none the less to be 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.' (10) The case, Isaac Holden and Sons, (1924) 12 Tax Cas 768, referred to by the Lord President is an interesting one, in that, on the date when the work was done, there was no contractual or other obligation on the part of the Government to pay what was subsequently paid. In that case, a firm of wool combers was engaged on commission basis during the time when the wool combing industry was controlled by the Government. A rate of commission was fixed in 1917. Again in 1918, a provisional increase of ten per cent was made, to be effective from 1st January of that year, and that was made subject to the adjustment of the accounts at the end of the year.

In the next year, a total increase of 20 per centwas allowed as final settlement of the firm's claimagainst the Govt. In submitting the accounts uptothe end of January 1918, to the Income-tax authorities the company showed in the books the full costof the work done, but included on the credit sideonly the original scale of commission plus ten percent that was current in that year. It was heldthat the accounts of that period should be reopened,so as to bring in full the additional 20 per cent andprofits ascertained for the purpose of computing thecompany's liability to the excess profits tax. RowlattJ. observed at page 772 :

'These wool-combers had done a certain amount of work by June 1918, and they were paid the 1917 tariff plus ten per cent upto 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, ten per cent more, in respect of the whole of 1918; pound for pound for their work they earned another ten per cent beyond what had been paid to 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 1913? If not, what did it arise from? Could it be said that it arose at all from the charity of the Government? I cannot see what it arose from, unless it arose from the trade in the first half year ..... I cannot see any sensible way of looking at 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 Commissioners 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,'

11. Wherever an increased price was paid at a later date, such increase being the result of reservation made at the time of supply of the goods, the case would be one of a trade debt, whether the extent of the debt was ascertained on the date of the transaction or later. But where the increased price was the result of a gratuitous act on the part of the Government who purchased the goods, no question of accrual can arise on the date of the transaction. When the increase, however, came in, it undoubtedly arose Out of the transaction, as but for it, the seller would not have got it. Such a case was treated as one equivalent or analogous to a trade debt, and the accounts were reopened, in order to bring the increase into the profits of the assessee in the year of the transaction.

The decision in (1924) 12 Tax Cas 768 recognised that the accounts could be reopened even when the price was increased later without there being any contractual obligation but purely by a voluntary act of the purchaser. In Johnson v. W. S. Try Ltd., (1947) 27 Tax Cas 167, Lord Greene, M. R., referring to the decision in (1924) 12 Tax Cas 768, observed that the actual amount payable for the work done under the contract in respect of a particular year was finally settled sometime after that year had expired, but that there again it was something which was quite clearly referable to a trading contract, and it could be fairly regarded as analogous to a trade debt, and that the circumstance that the amount of remuneration was only fixed at a later date did not alter the fact that the remuneration was in respect of trading operation of the earlier year.

12. The principle of these decisions was extended still further in Severne v. Dadswell, (1954) 35 Tax Cas 649. The assessee in that case was granted a licence to mill flour subsequent to the outbreak of the war. The millers who were doing the business before the outbreak of the war, had combined themselves into a pool company, in order to be able to negotiate favourable terms of remuneration to the members thereof. The assessee was not a member of the pool. The milling industry had come under the control of the Government during the period of war, thereby the flour manufactured by the millers was supplied to the Government at a particular rate fixed by it.

This rate was found to be uneconomical, having regard to the price of wheat then prevailing. The Government sought to relieve the millers by allowing certain rebates based on the quantity of the flour milled and supplied, the purpose of the rebate being to compensate the miller for the price he had to pay for the wheat. The millers, who were members of the pool company, had entered into an agreement with the Government which allowed them a a special rate of remuneration, in addition to the usual rebates. The assessee, not being a member of the pool, was not entitled to the remuneration given to the pool millers.

It appears that he was not even aware of the way in which the pool millers were remunerated. In 1942, he was asked to fill certain forms and forward them to the ministry. Towards the end of 1943, he was informed that the basis of the remuneration for non-pool millers was under the consideration of the Government. In 1949, sometime after the assessee had sold his business, the assessee was paid a compensation for the flour milled by him during the period ending 30-10-1945. A question arose whether the receipt was a trading receipt, and if so, in which year it had to be included. Roxburgh J. observed that the relevant question to be considered in such cases was, whether any work had been done in the course of trade in respect of which the reward had not been finally settled, or, in other words, anything outstanding in the nature of, or analogous to a book debt. After a consideration of the relevant cases, the learned Judge observed:

'that if it can be said at the moment of discontinuance that the payment for some work already done has not been finally settled, even though there is no legal claim for any more, then if a further payment is made afterwards, even though it is wholly gratuitous, the account can be reopened so as to let in what is analogous to a trade debt at the figure actually received. If, on the other hand, the item is not analogous to a trade debt, or if there has been a final settlement, the account has been finally closed.'

In the present case, the payment was made with the specific object of compensating the loss which the assessee sustained in the supply of bread in the year 1948-49. The relief itself was assessed on the basis of the quantity supplied by increasing the rate per loaf of bread. There is no doubt that the relief was referable to a trading contract. The result of the order of the Government was to increase the price of the bread supplied. That payment was however not the result of any contract, but the outcome of a unilateral act of Government ex gratia. Nevertheless, it would be analogous to the payment of a trade debt, and on the principle of the decision of (1954) 35 Tax Cas 649, the receipt should be credited in the accounts of 1948-49 by reopening the same.

13. Mr. Rama Rao Sahib, appearing for the Department, raised a two-fold contention: (1) that the principle of reopening of a closed account would only apply where something was outstanding, e.g., a question of ascertainment on the date of the transaction, and not to cases where there was nothing which could legitimately be said to be outstanding; the learned counsel sought to distinguish the Wool Combers' case, (1924) 12 Tax Cas 768, and Dadswell's case, (1954) 35 Tax Cas 649 on the footing, that there existed something in those cases before the closing of the year's accounts which ultimately was the cause of the receipt in the later years, but that in the present case there was none; and (2) that Dadswell's case, (1954) 35 Tax Cas 649 was wrongly decided.

14. Taking up the first contention, we are of opinion that there is no proper basis for the distinction. It is clear from the statement of facts contained in Dadswell's case, (1954) 35 Tax Cas 649, that the assessee was not aware during the year of account that he was at all going to be compensated. Indeed, it is specifically stated in the judgment of the learned Judge that even on the date when the assessee sold his business, neither he nor his accountant expected that any payment would be made beyond the usual rebates. The ratio of the case is not that there was any hope left in the asses-see to be able to get an increased payment for the goods supplied, but that the payment that was ultimately made, after the year of account, was towards a trading debt or one analogous to a trading debt. That was the principle adopted in (1924) 12 Tax Cas 768.

In both the cases, there was neither a legal right in the seller nor even any binding understanding between the parties to give any increased price. The payments that were ultimately made were purely voluntary. It may be that in the Wool Combers' case, (1924) 12 Tax Cas 768, there was a hope that the Government might give more, but the decision was based on the fact that the payment arose out of the work done or sale effected, and therefore was analogous to a trade debt; and that it should be treated as a payment towards a trade debt for the purpose of reopening the accounts.

15. It was next contended that Dadswell's case, (1954) 35 Tax Cas 649 was not correctly decided, inasmuch as it was not in conformity with certain earlier decisions. The first of the cases referred to in this connection was J. P. Hall and Co. Ltd. v. Commrs. of Inland Revenue, (1921) 12 Tax Cas 382. In that case, the company contracted in the year 1914 to supply electric motors with control gear between 1-7-1914 and 30-9-1915, it being stipulated that payment should be made one month after delivery. The company then entered into a sub-contract for the supply of the control gear, but owing to the war, there was a delay in the delivery thereof till July 1916.

The company credited the sale price of the control gear as and when the gear was delivered, but took up the plea (when assessment was made to excess profits duty) that its profits from the purchase and sale of the control gear should be treated as arising in the year of account, in which contracts were made. This contention was rejected, and it was held that the profits in the purchase and sale of the control gear arose only when it was delivered, on the ground that the profits were neither ascertained nor made at the time when the contracts were concluded. In Gray v. Penerhyn, (1937) 21 Tax Cas 252, the officials employed in the firm of the assessee misappropriated monies.

The auditors, by reason of their negligence, were not able to discover the fraud in time. Later, however, they admitted negligence on the part of their staff, and paid as compensation a sum equal to the amount misappropriated. It was held that the sum received from the auditors was trading receipt properly assessable to tax, and liable to be brought into the account only in the year in which it was received. Finlay J. also held that the accounts of the earlier years could be reopened, if necessary, and the amount credited. As pointed out in Simon's Income-tax, 2nd Vol., 2nd Edn. in Article 180, the decision should be taken as one rendered in the special circumstances of the case. In our opinion, the case is not one of a trade debt or analogous to it, but a payment by the auditors by way of damage for their negligence.

16. Incidentally Mr. Rama Rao Sahib relied on this for the further proposition viz., that the department had an option either to include the amount in the year of the transaction or the year of its receipt. We cannot however agree. Once it is held that the receipt was for a trade debt, it should properly go only with the accounts of the year of the transaction. To allow the department to include it in the year of its receipt, would be tantamount to changing the basis of account from the mercantile to the cash system.

17. In New Conveyor Co. Ltd. v. Dodd, (1945) 27 Tax Cas 11, the assessee was a sub-contractor supplying doors to two other companies, each of which had a contract with the Government. The prices for the doors were agreed as the cost of manufacture plus a fixed percentage for profit. It was agreed by the sub-contractor, namely, the assessee company, that it was to receive whatever sum was received by the principal contract as the price from the Government when the doors were delivered. There was a subsequent change in the calculation of the cost of manufacture, and the amount to be paid. The further sums paid in pursuance of the revised method of calculation were treated as trading receipts in the year in which the doors were delivered. It was held that the amounts would be attributable to the earliest contract, and should be allocated to the years in which the deliveries were made. These decisions should be considered as based, on the special circumstances existing in them.

19. Dadswell's case, (1954) 35 Tax Cas 649, has been considered by this Court more than once. The correctness of the decision therein has never been doubted.

20. The rule as to the reopening of closed accounts and the limits thereof was considered by this Court in Mudalai Nadar and Co. v. Commr. of Income-tax and Excess Profits Tax, : AIR1957Mad130 where an attempt to extend it to cases other than trade debts and those analogous to it was discountenanced. In that case, excise duty was paid by the assessee on quantities of the areca-nuts imported from the former Travancore State. The Government however revised their policy, and issued Instructions which directed the Excise authorities not to enforce payment. Those instructions were purely executive instructions, and were not acted upon; the assessee himself was not aware of the same at the time when he made the payments. During the following year, the assessee obtained refund from the Government of the amount which he had paid as excise duty.

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 will be noticed that the excise duty levied and collected was lawful in that it was in accordance with law as the payment of duty was made under a statute; the remission thereof a year later was the result of an independent act of the Government. No commercial element is involved in the case. 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. The judgment in that case was delivered by one of us, and considering Dadswell's case, (1954) 35 Tax Cas 649, it was observed at p. 200 (of ITR) : (at p. 132 of AIR):

'We have already pointed out that it could not be called a debt payable by the Government to the assessee. Nor could be it 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 made much later. It is difficult to find any basis for bringing the assessee's receipt of Rs. 36,094 within the scope of the ruling in Severne v. Dadswell, (1954) 35 Tax Cas 649, and treat it as income to which he was entitled in the relevant year of account.'

21. The principle of the decision in Dadswell's case, (1954) 35 Tax Cas 649 was again sought to be applied in regard to a liability which the assessee incurred in a subsequent year in Senthilkumara Nadar and Sons v. Commissioner or Income-tax, 1957-32 ITR 138. The assessee in that case had entered into contracts with the India Coffee Board for the purchase of coffee for export outside India, but he contravened the terms of the contract by selling a portion of the export quota within the Indian territory. Under the terms of the contract, the Coffee Board would have right to levy liquidated damages or to restore the status quo in any one of the three alternative ways mentioned in the agreement.

Three years subsequent to the year of account, the Coffee Board assessed damages which was paid by the assessee. The assessee claimed the amount paid as deduction in the year of account, when the sales contravening the terms of the contract were made. It was held that, until the Coffee Board made clear which of the alternatives it chose, the liability of the assessee was only a contingent liability in the year in which the sales were made, and, even if the assessee had debited itself in that year, the debit would have represented only a reserve provided against enforcement in future of what was a contingent liability; the liability could, therefore, arise only in the year when the claim for damages was made and ascertained.

A contingent liability cannot be expenditure coming within Section 10(2)(xv) and there was no scope for applying the principle in Dadswell's case, (1954) 85 Tax Cas 649. Whether Dadswell's case, (1954) 85 Tax Cas 649 was rightly decided, did not therefore arise for consideration in either of the two cases mentioned. In both of them, it was assumed to be correct, but the principle contained therein was held inapplicable to cases, where no question of a receipt analogous to that on a trade receipt arose. It was also held inapplicable to a liability which was 'purely contingent, having regard to the provisions of Section 10(2)(xv) of the Act. But where a receipt is correlated to and arises out of a commercial transaction between the parties, we are of opinion that the rule laid down by Roxbrough J. in Dadswell's case, (1954) 35 Tax Cas 649 should apply.

The principle that the accounts should be reopened even in respect of voluntary payments, has been laid down even earlier in (1924) 12 Tax Cas 768. In such cases, the right or liability should be deemed to have been established in the past accounting period. That principle as indicated before is not on any theory of accrual, because there was no legal right existing then; but being correlated to the transaction, it should properly belong to it, and the account should be reopened when the payment came in. To hold otherwise, would lead perhaps to inconvenient results. Take for instance a case where in the year of the receipt of such a voluntary payment, the assessee had no business, as in the Dads-well's case, (1954) 35 Tax Cas 649.

If the year of receipt is taken as deciding the liability, the assessee might well say that it is not business income, but a casual one. This, however, is not correct. The rule, however, has its own limitations. It will only apply to receipts in respect of trade debts and those equivalent or analogous to them. The question whether a particular receipt belongs to that category, would depend on the further question, for what it was paid; that it was paid under a contract or ex gratia, would make no difference. Nor is it necessary that something should exist in the year of account which ultimately led to the receipt to enable the reopening of the account.

22. In the present case, the amount of Rs. 12,447 was paid expressly for the loss incurred in connection with the supply of bread during the year 1948-49. The receipt would be analogous to a trading receipt of the year 1948-49. The account of that year could be reopened for the purpose of assessment. Being a receipt of an earlier year, the amount could not be included in the assessment for the year 1951-52.

23. In the result, we answer question No. 1 in the affirmative and against the assessee; the amount is assessable for the year 1948-49 in the assessment year 1949-50; by reopening the account; question No. 2 in the negative and in favour of the assessee. As the assessee has succeeded only on one of the two questions referred, there will be no order as to costs.

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