1980 (8) TMI 23 - HC - Income Tax

High Court rules decretal amount not taxable in 1970-71, assessable in 1971-72 on receipt. Penalty waived.

The High Court ruled in favor of the assessee, determining that the decretal amount was not taxable in the assessment year 1970-71 as it was in a state of ... Accrual, Income Issues Involved:1. Taxability of the decretal amount.2. Imposition of penalty for not declaring the decretal amount.Summary:Issue 1: Taxability of the Decretal AmountThe primary issue was whether the sum of Rs. 82,290, decreed in favor of the assessee by the Senior Subordinate Judge, was taxable in the assessment year 1970-71. The assessee, a registered firm dealing in foodgrains, had supplied wheat to the District Food and Supplies Controller, Bhatinda, and received Rs. 2,72,281. The cost of wheat was shown as Rs. 2,80,911 in the balance sheet. The assessee did not claim any loss for this transaction in the assessment year 1965-66. After winning a civil suit for an additional amount of Rs. 78,131, the total decretal amount of Rs. 82,290 was entered in the books as 'suspense account (Government litigation)' during the accounting year 1970-71. The ITO included this amount as revenue receipt in the assessment for 1970-71, determining the total income at Rs. 1,29,865. The Tribunal held that under the mercantile system of accounting, the amount should have been credited on an accrual basis in the year when the decree was passed.However, the High Court concluded that since the State Government had filed an appeal against the decree, the amount was in a state of flux and could not be deemed to have accrued in the assessment year 1970-71. The court held that the decretal amount should be taxed in the year it was actually received, i.e., 1971-72. Therefore, the Tribunal was not right in holding that the amount accrued to the assessee in the year the decree was passed.Issue 2: Imposition of PenaltyThe second issue was regarding the imposition of a penalty of Rs. 1,25,000 on the assessee for not declaring the decretal amount in the return for the earlier period. The Appellate Tribunal observed that the assessee had been transparent in its books of account and had not concealed any facts with the intention of evading tax. Consequently, the Tribunal waived the penalty, following the observations made in Regal Theatre v. CIT [1966] 59 ITR 449 (Punj).The High Court upheld the Tribunal's decision to waive the penalty, noting that the assessee had shown the details of the transaction in its books and had not indulged in any concealment of facts.Conclusion:The High Court answered the question in Reference No. 11 of 1976 in favor of the assessee, holding that the amount under the decree did not accrue in the assessment year 1970-71. Consequently, the questions in I.T.R. No. 74 of 1977 did not require a reply. The case was sent back to the Tribunal for a decision in light of this opinion, with parties bearing their own costs.