TMI Blog1976 (10) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... t should have been reduced by the amount of Rs. 1,11,466 ? " The relevant facts, briefly stated, are these : The assessment year in question is 1961-62. The assessee is a private limited company, which owns and runs amongst others a sugar factory at Majhalia, District Champaran (Bihar). The assessee purchased its mill engine from a German firm in the year 1932, but it was actually delivered late. In the year 1935, the assessee filed a suit against the German firm for a sum of Rs. 2,05,000 on the ground that the machinery was delivered late and in a defective condition. The claim of the assessee consisted of the following items : Rs. (i) Cost of replacing, altering and improving boilers, pumping set, steam receivers and pressure gauges, etc. ... 20,443.65 (ii) Damages for the number of days lost due to delay in the erection and defects and troubles in the boilers, pump- ing set, etc. ... 1,11,465.81 (iii) Loss of profit from 3-1-1933 to 1-6-1933, due to unsatisfactory working of the plant ... 27,498.19 (iv) Interest on the above sums up to 8-11-1935, being the date of filing the suit ... 45,592.35 -------------------- Total ... 2,05,000.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal by the revenue, the correctness of the finding of the AAC that the second item of the assessee's claim for damages was a capital receipt was challenged. The Tribunal disposed of the two appeals separately. In the assessee's appeal, i.e., ITA No. 17355 of 1966-67, the Tribunal also rejected the assessee's contention that the assessment was invalid on the ground that it was made under s. 143(3) of the present Act and not under s. 23(3) of the old Act. Before the Tribunal, the assessee reiterated its contention that the entire sum of Rs. 2,20,192.51 received as damages was a capital receipt and, hence, no part of it should have been included in its income. It (the assessee) also urged that as it was following regularly the mercantile system of accounting, the entire amount of damages accrued and became receivable prior to the previous year for the assessment year 1961-62, and, hence, no part of the amount could be brought to tax in the assessment for the year 1961-62. While dealing with the above contentions, the Tribunal said that the question relating to assessability of Rs. 1,11,466 (the second item of the assessee's claim against the German firm) would be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction and, therefore, it was assumed without any argument that the damages claimed were part and parcel of the assessee's sugar business in respect of which the assessee, as already stated, was maintaining accounts on mercantile basis. From the facts placed before the departmental authorities and before the Tribunal at the time of hearing of the appeal it can be reasonably inferred that no entries were made by the assessee in its accounts in respect of the damages claimed in any of the years prior to the previous year relevant for the assessment year under reference, when the sum of Rs. 2,20,192 was received, i.e., in the previous year ending July 31, 1960, relevant for the assessment year 1961-62 (under reference)... The short question before the Tribunal was whether in the case of an assessee following mercantile system of accounting an amount accrued in the earlier years, but not shown in those years, can be taxed as the income of the year in which it was received on the ground that it was not so shown and assessed in the earlier years. For reasons given in its appellate order, which need not be repeated here, it was held by the Tribunal that the amount could not be taxed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) of the present Act, cannot be regarded as invalid as it (the assessment) can be attributed to the jurisdiction vested in the ITO under the old Act. This was also the view taken by Pathak J. in Laxmi Industries Cold Storage Co. Pvt. Ltd. v. ITO [1971] 79 ITR 248 (All) and in Dhampur Sugar Mills' case [1973] 90 ITR 236 (All). As observed by his Lordship, the conditions and limitations to which the jurisdiction under s. 23(3) of the old Act is subject, do not differ in any material respect from those governing the corresponding jurisdiction under the present Act. Regarding the second question referred to us, Sri Ashok Gupta, learned counsel for the assessee, raised a preliminary objection that the question as to taxability of Rs. 1,11,466 (the second item of the assessee's claim against the German firm) cannot be considered in this reference since that question was expressly reserved by the Tribunal to be considered in the separate appeal filed by the I.T. department and, hence, did not arise out of the Tribunal's order out of which this reference has in turn arisen. Sri Gupta submitted that though the second question referred by the Tribunal relates to the whole of the sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no hesitation in rejecting the contention of the learned standing counsel that that question was raised before the Tribunal in ITA No. 17355 of 1966-67, that the Tribunal failed to deal with it, that that question must be deemed to have been dealt with by the Tribunal and that, therefore, that question is one arising out of its (the Tribunal's) order. The preliminary objection of Sri Gupta is, in our opinion, well founded. Hence, we restrict the scope of the second question referred to us by excluding the question of assessability of Rs. 1,11,466. Even as regards Rs. 20,443 (the first item of the assessee's claim for damages against the German firm), the ITO himself held that the amount was not assessable to tax being a receipt of a capital nature. When the ITO himself has treated this item to be so, the question of assessability of this amount did not arise for consideration before the AAC in the appeal filed by the assessee nor did it arise for consideration before the Tribunal in the further appeal filed by the assessee, ITA No. 17355 of 1966-67. Hence, the question of assessability of Rs. 20,443 also did not arise from the order of the Tribunal in ITA No. 17355 of 1966-67 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which a receipt should be taxed, thus : " 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 the mercantile system, subject to the deeming provisions, when has the right to receive accrued ? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year. " In CIT v. Chunilal V. Mehta and Sons (P) Ltd. [1971] 8 2 ITR 54 (SC), the assessee claimed compensation for termination of its managing agency. It filed a suit claiming Rs. 28 lakhs as compensation. The suit was decreed for Rs. 2,23,000. The assessee received the amount in December, 1955, and credited it in the profit and loss account for the year 1955. The question arose whether the amount accrued to the assessee on April 23, 1951, when its managing agency was terminated or whether it was assessable in the year 1956-57, since it received this amount in December, 1955. The Supreme Court held that the compens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in respect of the several items of the compensation realised by it (the assessee). As the Tribunal had expressly reserved the question of assessability of Rs. 1,11,466 to be considered in the other appeal (preferred by the revenue) and that question did not arise for consideration in ITA No. 17355 of 1966-67 (the appeal out of which this reference has arisen) it follows that the question, whether the capital cost of the plant should be reduced by the amount of Rs. 1,11,466, did not also arise for consideration in ITA No. 17355 of 1966-67, nor was it necessary for the Tribunal to consider that question, though not for the reason given by the Tribunal as to why it was not necessary. As a result of the foregoing discussions, our answers to the questions referred to us are as follows: (i) The assessment in question is valid in law. (ii) On the facts and circumstances of the case, the finding of the Tribunal that the compensation received by the assessee and entered in its books of account in the previous year (relevant to the assessment year in question) had, according to the mercantile system of accounting, become receivable prior to the said previous year, so tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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