Mercantile accounting and revised returns under the Income-tax Act determine accrual timing and assessment procedure.

A revised return filed after 1 April 1962 can bring the assessment within the Income-tax Act, 1961 where it is not filed in pursuance of a notice under the old Act, because the revised return substitutes the earlier return for assessment purposes. Under the mercantile system, compensation and interest are taxable when the right to receive accrues, not when cash is actually received or recorded in the books; compensation for loss of profits and interest up to the decree accrue on the date of decree, with later interest accruing year by year. The capital-cost reduction issue relating to Rs. 1,11,466 was treated as outside the scope of the assessee's appeal.

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Issues: (i) Whether the assessment for assessment year 1961-62 was valid under the Income-tax Act, 1961 despite the original return being filed with reference to the earlier Act. (ii) Whether the compensation and interest received on realisation of the decree were taxable in the year of receipt or had accrued earlier under the mercantile system of accounting, and whether the Tribunal was required to consider reduction of the capital cost by the amount of Rs. 1,11,466.

Issue (i): Whether the assessment for assessment year 1961-62 was valid under the Income-tax Act, 1961 despite the original return being filed with reference to the earlier Act.

Analysis: The assessee filed revised returns after 1 April 1962. Under section 297(2)(b) of the Income-tax Act, 1961, where a return is filed after commencement of the Act otherwise than in pursuance of notice under section 34 of the old Act, assessment for the relevant year is to be made under the 1961 Act. The revised returns substituted the earlier return for assessment purposes. On that footing, the assessment could validly be completed under the 1961 Act.

Conclusion: The assessment was valid in law.

Issue (ii): Whether the compensation and interest received on realisation of the decree were taxable in the year of receipt or had accrued earlier under the mercantile system of accounting, and whether the Tribunal was required to consider reduction of the capital cost by the amount of Rs. 1,11,466.

Analysis: For an assessee following the mercantile system, taxable income is governed by the year in which the right to receive accrues, not the year of actual receipt or the book entry. The right to receive compensation for loss of profits and interest up to the date of decree accrued on the date of decree, and later interest accrued year by year thereafter. The Tribunal's supplementary statement also showed that the disputed item of Rs. 1,11,466 did not arise for decision in the assessee's appeal and was reserved for the revenue's appeal; the same applied to any question of reduction of capital cost on that amount.

Conclusion: The Tribunal was justified in holding that the compensation had accrued earlier under the mercantile system, and it was also justified in treating the capital-cost issue relating to Rs. 1,11,466 as outside the scope of that appeal.

Final Conclusion: The reference was answered partly for the assessee and partly for the revenue, with the assessment upheld and the accrual-based treatment of the compensation sustained.

Ratio Decidendi: Under the mercantile system of accounting, income is taxable in the year in which the right to receive it accrues, and a revised return filed after commencement of the later Act attracts the procedural regime of that Act for assessment.

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