Supreme Court reverses High Court decision, includes Rs. 12,447 in 1951-52 assessment. Income accrues when right acquired.

Commissioner Of Income-Tax, Madras Versus A. Gajapathy Naidu

Commissioner Of Income-Tax, Madras Versus A. Gajapathy Naidu - [1964] 53 ITR 114 Issues Involved:
1. Assessability of the sum of Rs. 12,447 received by the respondent.
2. The correct assessment year for the sum of Rs. 12,447.

Issue-wise Detailed Analysis:

1. Assessability of the sum of Rs. 12,447 received by the respondent:

The High Court held that the sum of Rs. 12,447 received by the respondent from the Government was directly related to the business of the assessee and, therefore, was taxable as a trade receipt. This finding was not contested before the Supreme Court, and thus, nothing further needed to be said about it. The High Court answered the first question in the affirmative, confirming the assessability of the amount.

2. The correct assessment year for the sum of Rs. 12,447:

The High Court concluded that the amount of Rs. 12,447 should not be included in the assessment year 1951-52, based on three key steps:
- Step 1: The only right of the assessee when he supplied the bread was to debit the Government at the contract rate. The Government order for additional payment came later and was ex gratia, not based on a right. Therefore, the amount could not have been debited in the accounts for the year 1948-49.
- Step 2: A receipt correlated to a commercial transaction should be deemed to have been established in the past accounting period, even if no legal right existed then. The account should be reopened when the payment came in.
- Step 3: Being a receipt of an earlier year, the amount could not be included in the assessment for the year 1951-52.

The Supreme Court disagreed with the High Court's reliance on English decisions and emphasized that the Indian Income-tax Act should be construed on its own terms. The Court reiterated the principles from Commissioner of Income-tax v. Vazir Sultan and Sons, emphasizing that the Indian statute is not in pari materia with British income-tax statutes. The problem must be answered based on the express words used in section 4(1)(b)(i) of the Indian Income-tax Act, 1922.

The Court referred to the decision in E. D. Sassoon and Co. Ltd. v. Commissioner of Income-tax, which defined 'accrue' and 'arise' as indicating a right to receive, representing a stage anterior to when the income becomes receivable. Under the mercantile system of accounting, income accrues when the assessee acquires a right to receive it. The Court concluded that no provision in the Act allows relating back an income received in a subsequent year to an earlier year based on an earlier transaction.

The Supreme Court noted that the High Court's reasoning was influenced by English decisions, specifically P. Hall and Co. v. Commissioners of Inland Revenue and Severne v. Dadswell. However, the Court emphasized that these English decisions should not be applied to interpret the Indian statute, particularly when the provisions have received an authoritative interpretation from this Court.

The Court cited the Allahabad High Court's decision in Commissioner of Income-tax v. Kalicharan, which held that additional payments sanctioned after the closing of the accounting year could not be included in the assessment for that year. The Supreme Court agreed with this view, stating that the right to receive the additional amount arose after the closing of the accounting year 1945-46.

In conclusion, the Supreme Court held that the High Court should have answered the second question in the affirmative, confirming that the amount of Rs. 12,447 was correctly included in the assessment for the year 1951-52. The order of the High Court was set aside, and the appeal was allowed with costs.

Appeal allowed.