1964 (3) TMI 127 - HC - Income Tax

Income Tax Appeal: Timing of Compensation Receipt vs. Accrual

Mahalakshmi Rice & Oil Mill Versus Commissioner of Income Tax, Andhra Pradesh.

Mahalakshmi Rice & Oil Mill Versus Commissioner of Income Tax, Andhra Pradesh. - - Issues Involved:1. Determination of the assessment year for the sum of Rs. 44,000.2. Consideration of the accrual of income under the Indian Income Tax Act, 1922.Detailed Analysis:1. Determination of the Assessment Year for the Sum of Rs. 44,000The primary issue was whether the sum of Rs. 44,000 received by the assessee should be assessed in the assessment year 1956-57 or 1955-56. The assessee, a partnership involved in milling paddy into rice, was appointed as a procuring agent by the Government of Andhra State in 1954. The agreement required the assessee to purchase paddy, convert it into rice, and hold stocks on behalf of the Government. In May 1955, the Government of India allowed the assessee to dispose of the remaining stocks of rice on their private account against a compensation of Rs. 2-6-0 per maund, resulting in a payment of Rs. 44,000 in July 1955. The assessee included this sum in the return for the assessment year 1956-57.The Income Tax Appellate Tribunal upheld this inclusion, stating that the income was properly assessed in the assessment year 1956-57 as the claim was accepted and payment received in the relevant accounting year. The Tribunal's decision was challenged, arguing that the income accrued in 1954 when the contract was made.2. Consideration of the Accrual of Income under the Indian Income Tax Act, 1922The assessee's argument relied on the precedent set in Gajapathi Naidu v. Commissioner of Income Tax, where compensation received for a contract was deemed to have accrued in the year the contract was performed, not when the payment was received. However, the court distinguished this case, noting that the right to receive the Rs. 44,000 arose only in May 1955, not from the 1954 contract. The court emphasized that income accrues when a right to receive it is established, referencing E. D. Sassoon & Co. v. Commissioner of Income Tax, which stated that income accrues when a debt is created in favor of the assessee.The court also reviewed English cases cited by the assessee, such as Commissioners of Inland Revenue v. Newcastle Breweries Ltd., and found them inapplicable as they involved rights established in the accounting period, unlike the ex gratia payment in the present case. The court noted that the right to compensation did not arise from the original contract but from a subsequent agreement in 1955.The court further referenced Commissioner of Income Tax v. Kalicharan Jagannath, where additional payments sanctioned after the accounting year were not included in the earlier year's assessment. This supported the view that the right to receive the additional sum arose only when the review order was made.The court concluded that the Rs. 44,000 was not earned or accrued in the accounting year 1954-55 but in 1955-56, aligning with the assessee's initial treatment of the income. The court rejected the argument that the income accrued in 1954, emphasizing that the right to receive the compensation was established only in 1955.ConclusionThe court held that the sum of Rs. 44,000 was correctly included in the assessment year 1956-57. The assessee's argument that the income accrued in 1954 was dismissed, and the reference was answered in favor of the department, with costs awarded against the assessee.