Mercantile accounting and accrual of compensation: no taxability where no enforceable right arose in the relevant year.

Under the mercantile system, compensation is taxable only when the corresponding right to receive it accrues. A closure order by itself did not create any enforceable entitlement to compensation, and the earliest possible accrual arose only when the Government agreed to pay, which was communicated after the close of the previous year relevant to assessment year 1945-46. As that date also fell outside the relevant year, the compensation could not be assessed in assessment year 1945-46. The reference was answered in the negative, in favour of the assessee.

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Issues: Whether compensation received for closure of the rolling mill was assessable in the assessment year 1945-46 on the basis that the right to receive it accrued within the relevant previous year.

Analysis: Under the mercantile system, income is brought to charge when the right to receive it accrues. The closure order by itself did not confer any legal entitlement to compensation. The earliest possible accrual arose only when the Government agreed to pay compensation, which was communicated after the close of the previous year relevant to assessment year 1945-46. Since even that earliest date fell outside the relevant previous year, the amount could not be included in that assessment year. The second part of the referred question, relating to assessment year 1947-48, was not answered as it did not properly arise in the reference.

Conclusion: The compensation was not assessable in assessment year 1945-46 and the answer was in the negative, in favour of the assessee.

Ratio Decidendi: In mercantile accounting, a receipt is taxable only when the corresponding right to receive it has accrued, and where no enforceable right to compensation arises within the relevant previous year, the amount cannot be assessed in that year.

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