BABULAL NAROTIAMDAS AND ORS. vs. COMMISSIONER OF INCOME-TAX, BOMBAY

CIVIL APPEAL No. 685/1978Supreme Court1990 INSC 38714 December 1990Bench: 2 JudgesAuthor: P.B. SAWANT, M. FATHIMA BEEVI NAROTIAMDAS AND ORS.6 pages
AI SummaryDismissed

What were the facts?

The assessee, Babulal Narotamdas, maintained accounts under the mercantile system. He was the Managing Agent of Chandulal & Co. Ltd., which passed a resolution on July 20, 1949, to pay him special additional remuneration of Rs. 15,000 per annum. Shareholders filed a suit challenging the resolution. The trial court initially decreed the suit, but the High Court reversed this on appeal, upholding the resolution's validity. The company debited Rs. 15,000 for the year ending December 31, 1949, and treated subsequent amounts as contingent liabilities, as payment was deferred due to litigation. The assessee died on November 16, 1952, and his heirs received the dues in 1956. The Income Tax Officer brought to tax Rs. 15,000 for assessment years 1950-51, 1951-52, and 1952-53, and Rs. 13,125 for 1953-54, asserting income had accrued. The Appellate Assistant Commissioner confirmed this. The Tribunal, however, set aside the assessments, holding that income accrued only in November 1955 when the High Court judgment was pronounced.

What did the Supreme Court hold?

The Supreme Court dismissed the appeal, holding that the date of accrual is when the right to receive income is acquired. In this case, the Resolution passed on July 20, 1949, granted the assessee the right to receive Rs. 15,000 per annum. This income accrued at the end of each accounting year, irrespective of actual payment. The pending litigation and the company's assurance not to pay until the suit's disposal deferred only the payment, not the accrual of the right. The High Court's judgment affirming the resolution did not create the right but merely confirmed its validity. The Court distinguished the case of C.I.T. v. Hindusthan H & L Development Trust Ltd. Calcutta, stating that in this instance, the assessee's right to receive remuneration was not unsettled. The Court affirmed the principle that income accrues when a debt becomes due and that carrying an amount to a suspense account or withholding payment due to a dispute does not mean income has not accrued. The High Court was correct in answering the reference against the assessee.

What were the issues?

1. Whether, for assessment years 1950-51, 1951-52, and 1952-53, the sum of Rs. 15,000 each, and for assessment year 1953-54, a proportionate sum of Rs. 13,125, had accrued to the assessee as extra remuneration. Assessee's contention: The right to receive extra remuneration did not accrue until the High Court's judgment on November 25, 1955, validated the company's resolution. Until then, the company could not pay, nor could the assessee claim payment, as the suit was pending and the company had given an assurance not to pay. Therefore, the entire amount became payable and taxable only in the year of the judgment. Relied on C.I.T. v. Hindusthan H & L Development Trust Ltd. Calcutta. Revenue's contention: The High Court answered the reference in favour of the Revenue, holding that the income accrued when the resolution was passed, not when the suit was decided.

Which sections of the Income-tax Act were involved?

Section 66(1)

AI-generated summary — verify with the full judgment below

BABULAL NAROTIAMDAS AND ORS. v. COMMISSIONER OF INCOME-TAX, BOMBAY DECEMBER 14, 1990 A [P.B. SAWANT AND M. FATHIMA BEEVI, JJ.] B Income-Tax Act, 1922: Section 4-Right to receive extra remune- ration-Resolution authorising the payment challenged before Court- Resolution held Valid-Whether the right accrued from the date of Resolution or from date of judgment.

The appellant-assessee was maintaining the Mercantile system of C accounting. He was the Managing Agent of a company and by way of a Resolution passed on 20.7.1949 the compay bad agreed to pay the appellant special additional remuneration at the rate of Rs.15,000 per annum. However, a representative suit was filed by the shareholders of the company for perpetual injunction from giving such extra remunera- D tion and for declaring the Resolution as illegal. Trial Court decreed the suit. On appeal, the High Court reversed the decree and held that the Resolution was validly passed. Though the company debited the sum of Rs.15,000 for the year ended 31.12.1949 and in the subsequent years showed the sum as contingent liability, the amounts were not paid to the assessee during the relevant years. After the death of

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