Accrual of income: compensation for compulsory closure not taxable where right to receive arose after the relevant previous year.

Under the mercantile system the compensation is taxable when the right to receive accrues; the earliest accrual here arose when the government communicated willingness to pay by letter on 26 April 1945. Because there was no statutory or automatic entitlement before that communication and the relevant previous year ended on 18 January 1945, the right did not accrue within that previous year; accordingly the compensation was not assessable in the assessment year 1945-46 in favour of the assessee.

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Issues: Whether the compensation received for compulsory closure of the rolling mill was assessable in the assessment year 1945-46 (i.e., whether the right to receive the compensation accrued within the previous year relevant to assessment year 1945-46).

Analysis: The assessee maintained accounts on the mercantile system; under this system receipts are taxable when the right to receive accrues. The earliest date on which any right to compensation could be said to have accrued was the date when the Government expressed willingness to pay compensation, communicated by letter dated 26 April 1945. Prior to that date there was no statutory or automatic right to compensation established by law; the closure order required representations and the payment was by agreement of the Government. The previous year relevant to assessment year 1945-46 ended on 18 January 1945, so the earliest accrual date (26 April 1945) falls after that previous year. The alternative later dates (communication of amount on 28 December 1945 or receipt in November 1946) are not necessary to decide the question because the earliest possible accrual date is already outside the previous year in question.

Conclusion: The compensation did not accrue in the previous year relevant to assessment year 1945-46 and therefore was not assessable in assessment year 1945-46; answer to the question is in favour of the assessee.

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