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PETITIONER: THE COMMISSIONER OF INCOME-TAX, MADRAS

       Vs.

RESPONDENT: A.GAJAPATHY NAIDU

DATE OF JUDGMENT: 16/04/1964

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1964 AIR 1653            1964 SCR  (7) 767  CITATOR INFO :  R          1964 SC1766  (19)  F          1972 SC 268  (11)  RF         1975 SC 428  (4)  F          1992 SC 718  (7)

ACT: Indian  Incometax  Act, 1922 (11 of 1922),  s.  4(1)(b)(ii)- Construction  of-Analogy from English  Statutes-"Accrue"  or "arise",   meaning   of-Income  arising   out   of   earlier transaction Proper year of assessment.

HEADNOTE: A  certain  sum  of money was received by  the  assessee  as payment  of  compensation for the loss sustained by  him  in respect  of  a supply during the previous  accounting  year. The   .Income-tax  Officer  included  the  amount   in   the assessment  year it was received.  Appeals to the  Appellate Assistant  ComMissioner and to the Income-tax Tribunal  were unsuccessful.  But on a reference, the High Court held  that though  in  fact  the right to receive the  amount  did  not accrue during the accounting year of the contract, it should be deemed to have related to the year of contract in respect whereof the amount was paid.  On appeal by certificate, Held:     (i)  The decision of the High Court was  deflected by  its  reliance  on  English  decisions  delivered   under circumstances   peculiar   to  that  country  and   on   the construction  of provisions which were not in  pari  materia with the provisions obtaining in India. The  provisions  of  the  Indian  Income-tax  Act  shall  be construed  on  their own terms without drawing  any  analogy from  English statutes whose terms may superficially  appear to   be  similar  but  on  a  deeper  scrutiny  may   reveal differences not only in the wording but also in the  meaning a  particular expression has acquired in the context of  the development of law in that country. Commissioner  of Income-tax v. Vazir Sultan &  Sons,  [1959] Supp. 2 S.C.R., 375, followed;. (ii) under the definition accepted by this Court of the word "accrue" or "arise" in s. 4(1)(b)(i) of the Indian Incometax Act, an income accrues or arises when the assessee  acquires ,a right to receive the same.

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S.   D. Sassoon and Co. Ltd. v. Commissioner of  Income-tax, Bombay City, [1955] 1 S.C.R. 313, followed. Rogers Pyatt Shellack & Co. v. Secretary of State for  India (1925) I.L.R. 52 Cal. 1, approved. When an Income-tax Officer proceeds to include a  particular income in the assessment, he should ask himself, inter alia, two questions, namely (i) what is the system of  accountancy adopted by the assessee? and (ii) if it is mercantile system of  accountancy, subject to the deemed provisions  when  has the  right to receive that amount accrued?  If he  comes  to the  conclusion  that such a right accrued or arose  to  the assessee  in a particular accounting year, he shall  include the  said  income  in  the  assessment  of  the   succeeding assessment  year.  No power is conferred on  the  Income-tax Officer under the Act, to relate 768 back  an income that accrued or arose in a later year to  an earlier year on the ground that the said income arose out of an earlier transaction. (iii)     The meaning of the word "accrue" or "arise" in  s. 4(1)(b)(i)  of the Indian Income-tax Act cannot be  extended so as to take in amounts received by the assessee in a later year,  though the receipt was not an the basis of the  right accrued  in  the  earlier year.  Such  amounts  are  in  law received  by  the assessee only in the year  when  they  are paid. J.   P. Hall & Co. v Commissioner of Inland Revenue,  (1921) 12  T.  C. 382 and Severns (H.  M. Inspector  of  Taxes)  v. Dadawall, (1954). 35 T. C. 649, referred to. Commissioner  of  Income-tax,  U.P.  v.  P.  V.   Kalicharan Jagannath, [1961] 41 I.T.R. 40, approved.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 617 of  1963. Appeal from the judgment and order, dated March 15, 1960, of the Madras High Court in Case referred No. 87 of 1955. Gopal Singh and R.N. Sachthey, for the appellant. K.   Rajinder  Chaudhuri  and K.R. Chaudhri,  for  the  res- pondent. April 16. 1964.  The Judgment of the Court was delivered by SUBBA  RAO,  J.-This  appeal  by  certificate  is  preferred against the order of the High Court of Judicature at  Madras holding  that  a  sum  of  Rs.  12,447/-  received  by   the respondent  from the Government during the  accounting  year 1950-51  was not assessable to tax for the  assessment  year 1951-52. Gajapathy Naidu, the respondent, was supplying provisions to the Government Stanley Hospital.  Royapuram, Madras.  During the  financial  year  April 1, 1948 to March  31,  1949,  he entered  into a contract with the Government for the  supply of  bread to the said hospital at the rate of Rs. 0-4-6  per lb.  As the respondent was maintaining his accounts on  mer- cantile  basis, it is common case that the amount  due  from the  Government  under the terms of the  said  contract  was credited  in the accounts of the respondent for  that  year. For  the  assessment  year 1949-50  the  Income-tax  Officer assessed  the respondent to income-tax on the basis  of  the accounts so made.  It appears that some time after March 31, 1949,  representations  were  made  to  the  Government  for relieving  the  respondent from the loss  sustained  in  the supply  of  bread to the hospital.  The  Government  by  its order   dated  November  24,  1950,  directed   payment   of compensation  for  the loss sustained by the  respondent  in

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respect  of the supply of bread to the hospital  during  the year 1948-49 under the said contract.  The respondent re- 769 ceived  on that account payment of Rs. 12,447/-  during  the year  of  account 1950-51.  In the assessment  year  1951-52 the,  income-tax  Officer included the said  amount  in  the assessment   of  that  year.   The  assessee,  inter   alia, contended  that he received the said sum in respect  of  the contract  that was entered into by him with  the  Government during the accounting year 1948-49 and, therefore, it  could not  be  included  in the  assessment  year  1951-52.   This contention  was rejected by the Income-tax Officer  and,  on appeal, by the Appellate Assistant Commissioner and also, on further  appeal, by the Income-tax Appellate Tribunal.   But the  contention  received favour with the High  Court  on  a reference made to it under s. 66(1) of the Indian Income-tax Act,  1922, hereinafter called the Act.  The  following  two questions were referred to the High Court: "1. Whether the sum of Rs. 12,447/- is assessable to income- tax?  " "2.  If so, whether it has been rightly assessed in the  as- sessment year 1951-52." On  the  first question the High Court held  that  the  said amount was directly related to the business of the  assessee and, therefore, was taxable as a trade receipt.  It answered the  first  question in the affirmative.   No  argument  was raised before us on the question of the correctness of  this finding.  Therefore, nothing further need be said about it. The High Court answered the second question in the negative. Its conclusion is based upon the following three steps:               1.    "The only right of the assessee, on  the               date, when he               supplied   the   bread,  was  to   debit   the               Government the contract rate.  He was entitled               to  nothing  further.   The  Government  Order               which  raised the rates, came  into  existence               long  after payment thereunder was ex  gratia,               and  not on the basis of a right.   Therefore,               the  amount of Rs. 12,447 was not, and  indeed               could  not have been debited in the  books  of               the assessee for the year, when the supply  of               bread was made to the hospital, namely,  1948-               49.  Those accounts have been closed."               2.    But where a receipt is correlated to and               arises out of               a commercial transaction between the  parties,               the  right  or liability should be  deemed  to               have  been established in the past  accounting               period.   That principle is based not only  on               any  theory of accrual, because there  was  no               legal   right   existing   then;   but   being               correlated to the transaction, it  L/P(D)ISCI-               25               770               should properly belong to it, and the  account               should be re-opened when the payment came in.                          3.  "Being a receipt of an  earlier               year, the amount could    not  be included  in               the assessment for the year 1951-52." On  the  said reasoning the High Court held that  though  in fact  the right to receive the amount did not accrue  during the  accounting  year 1948-49, it should be deemed  to  have related  to  the  year of contract in  respect  whereof  the amount  was  paid.   The  Commissioner  of  Income-tax   has preferred  the present appeal against the said order of  the

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High Court. Learned  counsel  for the Revenue contended  that  the  High Court  misdirected itself on the basis of English  decisions and  that  on  its finding that the amount  accrued  to  the assessee  only during the accounting year 1949-50 it  should have held that the Income-tax Officer had correctly included it  in the assessee’s income for the year 1950-51.   Learned counsel  for the respondent argued that the said amount  was paid  in  respect of the contract entered into  between  the assessee and the Government and, therefore, the said  amount should  properly belong to the accounting year 1948-49,  and should not have been included in the assessment of the  year 1951-52.   To  sustain his argument he relied  upon  certain English  decisions referred to by the High Court which  held that in such circumstances the relevant account of the  year when the amount was due under the contract could be reopened and  the  additional amount, though an  ex  gratia  payment, could be included therein. With  great respect to the learned Judges of the High  Court we  must  point out that the decision of the High  Court  is deflected  by  its reliance on English  decisions  delivered under circumstances peculiar to that country and on the con- struction  of provisions which are not in pari materia  with the provisions obtaining in India.  The observations made by this  Court in Commissioner of Income-tax v. Vazir Sultan  & Sons(1) may usefully be restated--               "While   considering  the  case  law   it   is               necessary  to  bear in mind  that  the  Indian               Income-tax Act is not in pari materia with the               British   income-tax  statutes,  it  is   less               elaborate  in many ways, subject to fewer  re-               finements  and in arrangement and language  it               differs greatly from the provisions with which               the  courts  in  England  have  had  to  deal.               Little   help  can  therefore  be  gained   by               attempting to construe               (1)   [1959] Supp. 2 S.C.R. 375.               771               the  Indian  Income-tax Act in  the  light  of               decisions  bearing  upon the  meaning  of  the               income-tax  legislation  in England.   But  on               analogous provisions, fundamental concepts and               general    principle   unaffected    by    the               specialities   of   the   English    incometax               statutes,  English authorities may  be  useful               guides." The caution administered by this Court shall always be borne in mind in construing the provisions of the Indian  statute. The  provisions  of  the  Indian  Income-tax  Act  shall  be construed  on  their own terms without drawing  any  analogy from  English statutes whose terms may superficially  appear to   be  similar  but  on  a  deeper  scrutiny  may   reveal differences not only in the wording but also in the  meaning a  particular expression has acquired in the context of  the development of law in that country. The  problem  raised before us can only be answered  on  the true meaning of the express words used in s. 4 (1)(b)(i)  of the Act.  It reads: -               "Subject  to the provisions of this  Act,  the               total  income  of  any previous  year  of  any               person includes all income, profits and  gains               from whatever source derived which-               if  such  person is resident  in  the  taxable               territories during such year,-               accrue  or  arise or are deemed to  accrue  or

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             arise to him in the taxable territories during               such year.  " We  are  not  concerned in this  case  with  the  expression "deemed  to  accrue  or arise to him",  as  that  expression refers to cases set out in the statute itself introducing  a fiction  in  respect of certain incomes.  In regard  to  the question when and whether an income accrues or arises within the meaning of the first part of the said clause, we have  a decision  of  this Court which has  clearly  enunciated  the principles  underlying  the  said expression:  that  is  the decision  in  E.  D.  Sassoon  and  Company,  Ltd.,  v.  The Commissioner   of  Income-tax,  Bombay  City(1).   In   that decision  this  Court accepted the definition given  to  the words  "accrue" and "arise" by Mukerji, J., in Rogers  Pyatt Shellack & Co. v. Secretary of State for India(2), which  is as follows: "............  both the words are used in  contradistinction to the word "receive" and indicate a right to (1)  [1955] 1 S.C.R. 313, 342:(1954) 26 I.T.R. 27, 50. (2)  (1925) 1 I.T.C. 363, 371:(1925) I.L.R. 52 Cal. 1. L/IP(D) ISCI-25(a) 772 receive.   They represent a stage anterior to the  point  of time  when  the  income becomes  receivable  and  connote  a character of the income which is more or less inchoate." Under  this  definition accepted by this  Court,  an  income accrues  or  arises when the assessee acquires  a  right  to receive  the  same.  It is common place that there  are  two principal methods of accounting for the income, profits  and gains  of a business-, one is the cash basis and the  other, the  mercantile  basis.  The latter  system  of  accountancy "brings  into  credit  what is due  immediately  it  becomes legally  due  and  before it is actually  received;  and  it brings  into debit expenditure the amount for which a  legal liability   has   been  incurred  before  it   is   actually disbursed."  The book profits are taken for the  purpose  of assessment of tax, though the credit amount is not  realized or the debit amount is not actually disbursed.  If an income accrues  within  a  particular  year, it  is  liable  to  be -,assessed  in the succeeding year.  When does the right  to receive  an amount under a contract accrue or arise  to  the assessee  i.e., come into existence?  That depends upon  the terms of a particular contract.  No other relevant provision of the Act has been brought to our notice-for there is none- which provides an exception that though an assessee does not acquire  a right to receive an income under a contract in  a particular  accounting  year,  by some  fiction  the  amount received by him in a subsequent year in connection with  the contract,  though not arising out of a right accrued to  him in  the earlier year, could be related back to  the  earlier year  and made taxable along with the income of  that  year. But that legal position is sought to be reached by a process of  reasoning found favour with English courts.  It is  said that on the basis of proper commercial accounting  practice, if a transaction takes place in a particular year, all  that has accrued in respect of it, irrespective of the year  when it accrues, should belong to the year of transaction and for the purpose of reaching that result closed accounts could be reopened.   Whether  this  principle  is  justified  in  the English law, it has no place under the Indian Incometax Act. When an Income-tax Officer proceeds to include a  particular income in the assessment, he should ask himself inter  alia, two questions, namely, (i) what is the system of accountancy adopted by the assessee? and (ii) if it is mercantile system of  accountancy, subject to the deemed provisions, when  has

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the  right to receive that amount accrued?  If he  comes  to the  conclusion  that such a right accrued or arose  to  the assessee  in a particular accounting year, he shall  include the  said  income  in  the  assessment  of  the   succeeding assessment  year.  No power is conferred on  the  Income-tax Officer under the Act, to relate back an income that accrued or arose in a 773 subsequent  year to another earlier year on the ground  that the said income arose out of an earlier transaction.  Nor is the question of reopening of accounts relevant in the matter of as certaining when a particular income accrued or  arose. Section  34  of the Act empowers the Income-tax  Officer  to assess  the  income which escaped assessment or  was  under- assessed  in the relevant assessment year.  Subject  to  the provisions  of  the  section  and  following  the  procedure prescribed thereunder, he can include the escaped income and re-assess  the  assessee on the basis of which  the  earlier assessment  was  made.  So too, under s. 35 of the  Act  the officers  mentioned therein can rectify mistakes  either  of their own motion or when such mistakes are brought to  their notice by a party to the proceedings.  For that purpose  the correct  item may be taken into consideration in the  matter of  assessment.  But strictly speaking even in  those  cases there is no reopening of the accounts of the assessee, but a re-assessment  is  made or the mistake is corrected  on  the basis  of  the  actual income accrued  or  received  by  the assessee.   We do not see any relevancy of the  question  of reopening  of accounts in considering the question  when  an assessee acquired a right to receive an amount. We  shall now proceed to notice some of the decisions  cited at  the  Bar.   J.P. Hall & Co. v.  Commissioner  of  Inland Revenue(1) is a decision of the Court of Appeal under s.  38 of  the  Finance (No. 2) Act, 1915 (5 & 6 Geo.   V,  c.  89) dealing  with excess profits duty.  There it was  held  that for the purpose of Excess Profits Duty, the profits from the contracts  for  the purchase and sale of  the  control  -ear arose  to the appellant company in the accounting  years  in which the gear was actually delivered and not in the pre-war period  ending the 30th June, 1914, in which  the  contracts were  made.  The price of the control gear in that case  was increased   later  without  there  being   any   contractual obligation  but purely by a voluntary act of the  purchaser. Though  the additional amounts accrued to the assessee in  a later year, it was regarded as analogous to a trade debt due in respect of the trading operation of the earlier year.  On that principle the accounts were reopened in order to  bring the  increase  into profits of the assessee in the  year  of transaction.   This  decision was accepted and  extended  in Severns  (H.M. Inspector of Taxes) v. Dadswell(2).  As  this decision  is  the basis for the High Court’s view  we  shall give  its facts in some detail.  The respondent therein  was granted  a  licence  to mill flour  in  October,  1941,  and carried on the trade of flour milling until September, 1945. As he had not been a (1) (1921)1 12 T.C. 382.        (2) (1954) 35 T.C. 649. 774 miller  at the outbreak of war, he was not entitled  to  the benefit  of  a remuneration agreement whereby  millers  were compensated  by  the Ministry of Food  for  losses  incurred under  wartime  arrangements for the purchase of  wheat  and sale  of  flour.   Having, however,  been  informed  by  the Ministry  in 1943 and twice later that the  remuneration  of millers  who had begun milling during the period of  control was under consideration, he made a claim in 1949 on the same

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basis  as that laid down in the remuneration  agreement  and received  payments in settlement.  The respondent  contended that the sums received in 1949 were not trading receipts but ex  gratia  payments,  and  alternatively,  that  they  were received after the cessation of his trade and that if  there was a debt arising to the trade at the date of cessation its value  at that date was nil.  The Court held that  the  said payments were ex gratia; and it further held that, if on the discontinuance of a trade payment for work already done in a year  had not been finally settled. accounts for  that  year could be reopened so as to bring in a gratuitous payment for such  work  made in a subsequent year.  This  judgment  cer- tainly   supports  the  respondent.   Though  it  could   be distinguished  on the ground in that case it was found  that the  payment for the work already done had not been  finally settled whereas in the present case there is nothing on  the record  to  disclose that it was not  finally  settled.   We would  prefer to base our conclusion on the ground  that  we cannot  extend the meaning of the word "accrue" -or  "arise" in  s.  4(1)(b)(i)  of  the Act so as  to  take  in  amounts received by the assessee in a later year, though the receipt was  not  on the basis of the right accrued in  the  earlier year.  Such amounts are in law received by the assessee only in the year when they are paid.  We cannot apply the English decisions in the matter of construction of the provisions of the  Indian  Act, particularly when they  have  received  an authoritative interpretation from this Court, in this  view, it  is not necessary to consider further  English  decisions cited  by learned counsel for the respondent in  support  of his  contention.  Before a Division Bench of  the  Allahabad High Court in Commissioner of Income tax, U.P. v. Kalicharan Jagannath(1), when a similar question arose, learned counsel appearing for the Revenue relied upon the said English deci- sions,  but the High Court, rightly, refused to act on  them on the ground that they were not relevant in interpreting s. 4 of the Indian Income-tax Act.  It further made an  attempt to  distinguish  those decisions on grounds based  upon  the alleged  difference in the scope of the provisions  ’of  the respective  countries.  It was said that under the  relevant English   Act  the  excess  profits  duty  was  payable   on computation  of profits arising from a trade or business  in different chargeable accounting periods and, therefore.  the emphasis there was more (1)  (1961) 41 I.T.R. 40.                             775 upon  the  carrying on ’of the trade within  the  chargeable period than on the income accruing during that period.   But we do not propose to express our view on this aspect of  the question, as the relevant sections of the English Acts  have not been placed before us.  The learned Judges, after having rightly   refused  to  rely  upon  the  English   decisions, construed  the  provisions of the  Indian  statute.   There. during  the  accounting period April 1, 1945  to  March  31, 1946, the assessee entered into a contract with and supplied fruits and bullock carts to, the military authorities at two different  places  at  rates fixed by  the  agreement.   The assessee  incurred  a loss and he submitted a  petition  for review  under the terms of the -agreement.  On  November  6, 1947, the military authorities sanctioned the payment of  an additional sum which was paid to the assessee on February 17 and 24, 1948.  The Incorne-tax Department sought to  include this  additional  sum in the assessment for  the  accounting year  1945-46.  The High Court held that until the order  of review the only right that the assessee had was to claim the money payable at the rates laid down in the agreement itself

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and  that  the  additional  amount  became  payable  to  the assessee  not  by  virtue  of any  right  conferred  by  the agreement,  but  because  of  the  order  passed  in  review directing  the  payment of the amount and  thus  creating  a right  to  this amount in favour of the  assessee.   As  the right  to  receive the payment of the additional  sum  arose after  the closing of the accounting year 1945-46, the  High Court  proceeded to hold that the income did not  accrue  or arise  to  the assessee in the accounting year.  It  may  be pointed out that in that case the original agreement gave  a right to apply for review and notwithstanding that fact  the court held that the additional payment could not be held  to have  accrued during the accounting year.  For  the  reasons already stated by us, we are entirely in agreement with  the view expressed by the Allahabad High Court. In  the result, we hold that the High Court in  the  present case should have answered the second question referred to it in  the  affirmative.  The order of the High  Court  is  set aside ,and the appeal is allowed with costs.                   Appeal allowed. 776