TMI Blog1960 (3) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... nment, it is said, after the close of the year for relieving the contractor from the loss sustained in the supply of bread. The Government acceded to the request and passed G.O. No. Mis. 4005, Home, dated November 24, 1950, directing payment of compensation for the loss sustained by the contractor in the supply of bread in the year 1948-49. The assessee submitted a bill on December 27, 1950, and received a payment of ₹ 12,447 during the year of account corresponding to the year of assessment 1951-52. In the assessment of the income-tax for that year, namely, 1951-52, the Officer included the sum of ₹ 12,447. The assessee contested the inclusion on two grounds, (1) that it was in the nature of a windfall, and (2) that it being a receipt in respect of a contract performed in the year relating to the assessment year 1949-50, it could not be included in the assessment for the year 1951-52. The contentions were overruled, and the amount was brought to tax. An appeal to the Appellate Assistant Commissioner and further appeal to the Tribunal met with no success. The first question, which relates to the contention that the receipt was of a casual nature, presents little diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived or not, and what is payable, that is, that to which a legal liability attaches is brought into debit side, whether paid or not, has been explained in the decision for the Supreme Court in Keshav Mills. v. Commissioner of Income-tax [1953] 23 I.T.R. 230. The observations of the Supreme court extracted above establish that, in the mercantile system of accounting, an income could be said to be accrued, even though it had not been ascertained on the date of the transaction, the requirement for the accrual being the right existing in the person at the time. In the present case, 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 G.O. 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 ₹ 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. These accounts have been closed. It, therefore, becomes a matter for consideration whether, on principles of accounting, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the right or liability did not arise until a later period. As the illustrative cases mentioned by the learned author would show, the right or liability, the existence of which in the past is a prerequisite for the jurisdiction to reopen, may be one which exists or is deemed to have existed. A simple case is one, in which a receipt can be added to the profit and loss account of the past period, if title to that sum arose in that period, notwithstanding the fact that the precise amount was not ascertained till a later period. In commissioners of Inland Revenue v. Newcastle Breweries Ltd. [1927] 12 Tax Cas. 927, the assessee carried on the business of brewers and wine, and in the course of their business, kept large stocks of rum which was reduced and blended before sale. A portion of the assessee's stock of rum was requisitioned by the Admiralty in January, 1918, and payment thereof at a specified rate was accepted by the company without prejudice to a claim for a larger payment. Litigation followed in regard to the actual amount due, and pending the litigation, legislation was passed, providing for a method of compensation in similar cases. The amount due was so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , if a transaction takes place, all that has accrued in respect of it on the date of the transaction itself. If, for instance, there has been a sale of goods, the entire price, having been earned by virtue of that sale, should be credited as on that date; if the price is not ascertainable till after the close of the year, the accounts are reopened for the purpose. This aspect of the matter is summed up by Lord President Cooper in James Spencer and Co. v. Commissioners of Inland Revenue [1950] 32 Tax Cas. 111, 116: From an examination of the numerous cases conveniently summarised in Simon on Income-Tax II, 128ff., the broad working rule which emerges as a guide to the crediting or debiting in a tax computation of subsequently maturing credits or debits is to enquire in which accounting period the right or liability was established and to carry the item into the account in that year. I use the vague word 'established' advisedly, for we are now in the region of proper commercial and accountancy practice rather than of systematic jurisprudence. In the case of credit items, such cases as Newcastle Breweries [1927] 12 Tax Cas. 927 and Isaac Holden and Sons [1924] 24 Tax Cas. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uncertain whether they ever would receive more at that time; they certainly had no right to demand more. It was uncertain that they ever would receive more and it might be that they would receive less the next half-year. That is quite clear, but in the result what happened? They were paid 20 per cent. that is to say, 10 per cent more, in respect of the whole of 1918; pound of pound of their work they earned another 10 per cent. beyond what had been paid them in June, 1918; if they did more week they got more; if they did less work they got less. It was paid to them as the Solicitor-General says, in respect of work in 1918, including the half-year. Looking at it merely on those facts, what have I to say? Did not that arise form the work that they did in their trade in the first half of 1918? If not, what did it arise from? Could it be said that it arose at all from the charity of the Government? I cannot see what it arose from, unless it arose from the trade in the first half-year..........I cannot see any sensible was of looking at the facts other than that which leads me to say that these profits arose from the business in the accounting period, and, therefore, that the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not a member of the pool. The milling industry had come under the control of the Government during the period of war; thereby the flour manufactured by the millers was supplied to the Government at a particular rate fixed by it. This rate was found to be uneconomical, having regard to the price of wheat then prevailing. The Government sought to relieve the millers by allowing certain rebates based on the quantity of the flour milled and supplied, the purpose of the rebate being to compensate the miller for the price he had to pay for the wheat. The millers, who were members of the pool company, had entered into an agreement with the Government which allowed them a special rate of remuneration, in addition to the usual rebates. The assessee, not being a member of the pool was not entitled to the remuneration given to the poll millers. It appears that he was not even aware of the way in which the pool millers were remunerated. In 1942, he was asked to fill certain forms and forward them to the Ministry. Towards the end of 1943, he was informed that the basis of the remuneration for non-pool millers was under the consideration of the Government. In 1949, sometime after the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 649, on the footing, that there existed something in those cases before the closing of the year's accounts which ultimately was the cause of the receipt in the later years, but that in the present case there was none; and (2) that Dadswell's case [1954] 35 Tax Cas. 649 was wrongly decided. Taking up the first contention, we are of opinion that there is no proper basis for the distinction. It is clear from the statement of facts contained in Dadswell's case [1954] 35 Tax Cas. 649 that the assessee was not aware during the year of account that he was at all going to be compensated. Indeed, it is specifically stated in the judgment of the learned judge that even on the date when the assessee sold his business, neither he nor his accountant expected that any payment would be made beyond the usual rebates. The ratio of the case is not that there was any hope left in the assessee to be able to get an increased payment for the goods supplied, but that the payment that was ultimately made, after the year of account, was towards trading debt or one analogous to a trading debt. That was the principle adopted in Isaac Holden and Sons Ltd. v. Commissioner of Inland Revenue. In b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J., also held that the accounts of the earlier years could be reopened, if necessary, and the amount credited. As pointed out in Simon's Income Tax, 2nd volume (2nd Edition), in article 180, the decision should be taken as one rendered in the special circumstances of the case. In our opinion, the case is not one of a trade debt or analogous to it, but a payment by the auditors by way of damages for their negligence. Incidentally, Mr. Rama Rao Sahib relied on this for the further proposition, viz., that the Department had an option either to include the amount in the year of the transaction or the year of its receipt. We cannot however agree. Once it is held that the receipt was for a trade debt, it should properly go only with the accounts of the year of the transaction. To allow the Department to include it in the year of its receipt would be tantamount to changing the basis of account from the mercantile to the cash system. In new Conveyor Co. Ltd. v. Dodd (Inspector of Taxes) [1945] 27 Tax Cas. 11 the assessee was sub-contractor supplying doors to two other companies, each of which had a contract with the Government. The prices for the doors were agreed as the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering Dadswell's case [1954] 35 Tax Cas. 649, it was observed at page 200 [1956] 30 I.T.R. 191: We have already pointed out that it could not be called a debt payable by the Government to the assessee. Nor could it be treated as something analogous to a trade debt. No doubt the tax was imposed originally in the year of account on the basis of the trade activities of the assessee. But it is equally true that it was for a tax that was eventually remitted and paid to the assessee, paid not in the year of account but in the succeeding years of account. But it was not payment by way of remuneration, as in the case of Mr. Dadswell, for anything done by the assessee in the course of his trading activities in the year of account. Once again, we have to point out that the tax was lawfully levied and lawfully collected. The Government decided to remit the tax, and payment was made much later. It is difficult to find any basis for bringing the assessee's receipt of ₹ 36,094 within the scope of the ruling in Severne v. Dadswell [1954] 35 Tax Cas. 649, and treat is as income to which he was entitled in the relevant year of account. The principal of the decision in Dadsw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Isaac Holden and Sons Ltd. v. Commissioners of Inland Revenue [1924] 12 Tax Cas. 768. In such cases, the right or liability should be deemed to have been established in the past accounting period. That principle as indicated before is not on any theory of accrual, because there was no legal right existing then; but being correlated to the transaction, it should properly belong to it, and the account should be reopened when the payment came in. To hold otherwise would lead perhaps to inconvenient results. Take for instance a case where in the year of the receipt of such a voluntary payment, the assessee had no business, as in Dadswell's case [1954] 35 Tax Cas. 649. If the year of receipt is taken as deciding the liability, the assessee might well say that it is not business income, but a casual one. This, however, is not correct. The rule, however, has its own limitations. It will only apply to receipts in respect of trade debts and those equivalent or analogous to them. The question whether a particular receipt belongs to that category, would depend on the further question, for what it was paid; that it was paid under a contract or ex gratia, would make no difference. Nor is i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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