Ex gratia payment linked to a trading contract was taxable as business income in the year of the transaction.

An ex gratia Government payment made to compensate loss under a completed trading contract was treated as a trade receipt because it was directly referable to the business operation and operated as an ition to the price of the goods supplied. Under the mercantile system, the amount was attributable to the accounting year in which the trading transaction occurred, even though payment was received later and no enforceable right existed at the time of supply. The text states that such later receipts may justify reopening closed accounts where they are analogous to a trade debt, but not where they are unrelated or contingent. The receipt was therefore taxable as business income in the earlier year, not the year of receipt.

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Issues: (i) Whether a compensation payment received ex gratia from the Government for loss suffered in the course of a trading contract constituted a taxable trade receipt. (ii) If taxable, whether the amount was assessable in the year of actual receipt or in the earlier accounting year to which the transaction related by reopening the closed accounts.

Issue (i): Whether a compensation payment received ex gratia from the Government for loss suffered in the course of a trading contract constituted a taxable trade receipt.

Analysis: The receipt was directly connected with the assessee's business and was paid to make good the loss arising from supply of bread under the trading contract. The fact that the payment was made as an act of grace did not alter its character, because the amount represented an addition to the price of the goods supplied and arose out of the business operation.

Conclusion: The receipt was a trade receipt and was assessable to tax, against the assessee on this issue.

Issue (ii): If taxable, whether the amount was assessable in the year of actual receipt or in the earlier accounting year to which the transaction related by reopening the closed accounts.

Analysis: Under the mercantile system, income is credited when the right to receive it arises. Even where no legal right existed at the time of supply, a later payment that is referable to the trading transaction and is analogous to a trade debt may justify reopening the closed accounts of the year in which the transaction occurred. The receipt here was made to compensate the loss incurred in 1948-49 and belonged to that year rather than the year of receipt. The principle was applied only to receipts linked to trade debts or their equivalents, and not to unrelated or contingent claims.

Conclusion: The amount was assessable in 1948-49 and could not be brought to tax in 1951-52, in favour of the assessee on this issue.

Final Conclusion: The receipt was taxable as business income, but it had to be attributed to the earlier accounting year by reopening the closed accounts, so the assessment for the later year was unsustainable.

Ratio Decidendi: A later ex gratia payment that is directly referable to a completed trading transaction and is analogous to a trade debt is to be brought into the accounts of the year of the transaction under the mercantile system by reopening the closed accounts, even though no enforceable right to the amount existed when the transaction was completed.

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