1970 (4) TMI 45 - HC - Income Tax

Court rules on taxability of disputed amount claimed by assessee from municipality under Income-tax Act, 1922

The court ruled against the taxability of the disputed amount claimed by the assessee from the Nadiad Municipality under the Income-tax Act, 1922. It held ... Bills sent for excess amounts and entries for such amounts are made in the accounts - amount shown in its balance-sheet as an asset under the head 'Sundry creditors considered doubtful' - taxability of such amount when assessee is legally entitled to lesser amount Issues:Interpretation of tax liability on the amount claimed by the assessee from the Nadiad Municipality under sections 10 and 13 of the Income-tax Act, 1922.Analysis:The judgment pertains to a reference under section 66(1) of the Indian Income-tax Act, 1922, concerning the inclusion of an amount claimed by an assessee from the Nadiad Municipality in the assessee's income for the accounting year ending March 31, 1961. The assessee, a company supplying electricity, had an agreement with the Municipality for a fixed period which expired in August 1960. Subsequently, a dispute arose regarding the billing rate, leading to legal proceedings. The assessee credited the amount received at a lower rate in its books, while the revenue sought to tax the balance amount. The Tribunal held the disputed amount not includible in the assessable income, prompting the Commissioner of Income-tax to raise the issue.The crux of the matter lies in determining whether the disputed amount accrued or arose to the assessee during the relevant accounting year, as income under the mercantile system must be taxed when it accrues. The court emphasized that a legal right to recover is essential for income to accrue, and sending bills alone does not establish such a right. In this case, the expired agreement did not confer a legal right to charge the Municipality at a higher rate, as bills sent at 30 paise per unit were merely attempts to recover amounts, while actual receipts were at 19 paise per unit. The court noted the Gujarat High Court's judgment upholding the assessee's obligation to supply electricity at the agreed rate, but stressed the absence of evidence supporting a legal right to charge a higher rate. Consequently, the court concluded that only the amount calculated at 19 paise per unit could be taxed, rejecting the inclusion of the disputed amount.In conclusion, the court answered the reference question in the negative, ruling against the taxability of the disputed amount. The Commissioner was directed to bear the assessee's costs, highlighting the legal intricacies surrounding income accrual and tax liability in the context of contractual agreements and billing disputes.