High Court rules Rs. 22.5 lakh gift not income. Payment timing crucial.

The High Court ruled in favor of the assessee, holding that the sum of Rs. 22.5 lakhs receivable from the U.K. company was not income but a casual and windfall gift. Additionally, the Rs. 22.5 lakhs credited to the profit and loss account did not accrue as income during the relevant year, as the actual payment was received in subsequent years. The Court emphasized that the payment lacked the character of income and referenced relevant case law to support its decision.

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Issues Involved:

1. Whether the sum of Rs. 22.5 lakhs receivable by the assessee from the U.K. company with reference to the Baroda Refinery project was of the character of income.
2. Whether Rs. 22.5 lakhs credited to the profit and loss account of the assessee for the previous year ended September 28, 1968, accrued as income of the assessee during the previous year.

Summary:

Issue 1: Character of the Sum of Rs. 22.5 Lakhs

The High Court considered whether the sum of Rs. 22.5 lakhs receivable by the assessee from the U.K. company with reference to the Baroda Refinery project was of the character of income. The assessee, a wholly-owned subsidiary of Stewarts & Lloyds Ltd. of London, entered into a contract with the Indian Oil Corporation and incurred a loss of Rs. 57.85 lakhs. The U.K. company resolved to indemnify the assessee up to Rs. 25 lakhs without any legal obligation. The Income-tax Officer treated the sum as a revenue receipt, but the Appellate Assistant Commissioner and the Tribunal held it was a casual and windfall gift, not income. The Tribunal emphasized that the payment was not attributable to any legal obligation or custom, and the receipt lacked the character of income. The High Court affirmed this view, noting that the payment was benevolent and constituted a gesture of goodwill, not a trading or revenue receipt. The Court cited the Supreme Court's decision in India Discount Co. Ltd.'s case, emphasizing that a receipt not regarded as income in law cannot be treated as such merely due to its erroneous credit in the profit and loss account.

Issue 2: Accrual of Income

The High Court also examined whether Rs. 22.5 lakhs credited to the profit and loss account of the assessee for the previous year ended September 28, 1968, accrued as income during that year. The Tribunal found that the actual payment was received by the assessee from the U.K. company during the years 1969 to 1972. The resolution dated January 28, 1967, indicated an intention to make the payment over two years after ascertaining the loss. The Tribunal held that no right to receive the amount accrued during the relevant accounting year, and the erroneous credit in the profit and loss account did not alter this position. The High Court accepted this finding, referencing the Supreme Court's decision in E. D. Sassoon & Company Ltd.'s case, which stated that the accrual of income does not depend on the accounts of the assessee. The Court concluded that no income had accrued to the assessee during the relevant period and answered the question in the affirmative, in favor of the assessee.

Conclusion:

The High Court answered both questions in the affirmative and in favor of the assessee, holding that the sum of Rs. 22.5 lakhs was not of the character of income and did not accrue as income during the relevant accounting year. There was no order as to costs.

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