1960 (5) TMI 30 - HC - Income Tax

Compensation for mill closure not taxable in 1945-46 assessment year

Radhey Lal Mannilal Versus Commissioner of Income-tax

The High Court ruled that the compensation amount of Rs. 25,978 received for the closure of the rolling mill was not assessable in the assessment year ... - Issues:Assessment year for income received as compensation for closure of rolling mill.Analysis:The case involved a question regarding the assessability of income received as compensation for the closure of a rolling mill in a specific assessment year. The assessee, a registered firm dealing in iron and ore rolling mill, had to cease production due to a shortage of coal as per the orders of the Government of India. The Steel Rolling Mills Association of India represented the assessee for compensation, which was agreed upon by the government. The compensation amount of Rs. 25,978 was received by the assessee in November 1946 for the closure period from August 1944 to June 1945. The Income-tax Officer sought to include this amount in the taxable income for the assessment year 1945-46. The Tribunal upheld the decision, leading to the reference to the High Court.The key issue was whether the compensation amount was assessable in the year of assessment 1945-46 or in the subsequent year of 1947-48. The Tribunal considered the date of the order for closure as the accrual date for the right to receive compensation, falling within the previous year relevant to 1945-46. However, the High Court disagreed, stating that the right to compensation accrues when the government agrees to pay. The earliest possible date for accrual was the communication of the compensation amount on April 26, 1945, which was after the end of the previous year. Therefore, the compensation amount could not be included in the assessment for 1945-46.The High Court clarified that the second part of the question, regarding the assessment year 1947-48, was irrelevant to the current proceedings. As the decision favored the assessee, they were entitled to the costs of the reference. The Court refrained from answering the second part of the question due to its inappropriateness in the appeal context. The judgment emphasized the importance of when the right to receive compensation accrues under the mercantile system of accounting, ultimately determining the assessability of the income in the relevant assessment year.In conclusion, the High Court held that the compensation amount of Rs. 25,978 received for the closure of the rolling mill was not assessable in the assessment year 1945-46. The decision was based on the accrual date of the right to receive compensation, which was after the end of the previous year, making it ineligible for inclusion in the taxable income for that year.