THE COMMISSIONER OF INCOME TAX, MADRAS vs. A. GAJAPATHY NAIDU

CIVIL APPEAL No. 617/1963Supreme Court[1964] 7 S.C.R. 76716 April 1964Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI9 pages
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What were the facts?

The assessee, A. Gajapathy Naidu, was engaged in supplying provisions to the Government. During the financial year April 1, 1948, to March 31, 1949, he entered into a contract for the supply of bread. The assessee maintained accounts on a mercantile basis, and the amount due was credited for that year. For the assessment year 1949-50, the Income-tax Officer assessed the income based on these accounts. Subsequently, the Government, by an order dated November 24, 1950, directed payment of compensation for losses sustained by the assessee during 1948-49. The assessee received Rs. 12,447/- on this account during the accounting year 1950-51. The Income-tax Officer included this amount in the assessment for the assessment year 1951-52. Appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were unsuccessful. However, the High Court, on a reference, held that the amount was not assessable in assessment year 1951-52.

What did the Supreme Court hold?

The Supreme Court held that the High Court's decision was deflected by its reliance on English decisions, which were not in pari materia with Indian statutes. The Court reiterated that Indian Income-tax Act provisions should be construed on their own terms. Following its own definition of 'accrue' or 'arise' in Section 4(1)(b)(i) of the Act, an income accrues or arises when the assessee acquires a right to receive it. The Court stated that an Income-tax Officer must consider the assessee's accounting system and when the right to receive an amount accrued. No power exists under the Act to relate an income that accrued in a later year to an earlier year simply because it arose from an earlier transaction. The meaning of 'accrue' or 'arise' cannot be extended to include amounts received in a later year if the right to receive them did not accrue in the earlier year; such amounts are legally received only in the year they are paid. The Court found agreement with the Allahabad High Court's reasoning in a similar case, which held that an additional payment sanctioned by a review order, creating a right only after the accounting year closed, did not accrue in that year. Therefore, the Supreme Court held that the High Court should have answered the second question in the affirmative. The order of the High Court was set aside, and the appeal was allowed.

What were the issues?

1. Whether the sum of Rs. 12,447/- is assessable to income-tax? (Question of law) 2. If so, whether it has been rightly assessed in the assessment year 1951-52? (Question of mixed law and fact, turning on the interpretation of Section 4(1)(b)(ii) of the Indian Income-tax Act, 1922). Assessee's arguments (as inferred from the High Court's reasoning and the Supreme Court's analysis): The assessee contended that the sum received was in respect of a contract entered into during the accounting year 1948-49 and therefore could not be included in the assessment year 1951-52. The High Court accepted this, holding that the amount was ex gratia and not based on a right that accrued in the earlier year, and thus could not be debited in the books for 1948-49. The High Court reasoned that though no legal right existed in the earlier period, the receipt was correlated to the transaction and should be deemed to belong to that period. Revenue's arguments: The Revenue contended that the High Court misdirected itself by relying on English decisions. The Revenue argued that if the amount accrued to the assessee only during the accounting year 1949-50 (as per the High Court's finding), then the Income-tax Officer had correctly included it in the assessment for the subsequent year.

Which sections of the Income-tax Act were involved?

Section 4(1)(b)(ii),Section 4(1)(b)(i),Section 66(1)

AI-generated summary — verify with the full judgment below

7 S.C.R. SUPREME COURT REPORTS 767 THE COMMISSIONER OF INCOME·TAX, MADRAS v. A. GAJAPATHY NAIDU (K. SUBBA RAO, J. C. SHAH AND S. M. SIKRI, JJ.] Indian Incometax Act, 1922 (11 of 1922), s. 4(1)(b)(ii)- Construction of-Analogy from English Statuaes-"Accrue" or "arise", meaning of-Income arising out of earlier :transaction- Proper year of assessment. A certain sum of money was received by the assessee as payment of compensation for the loss sustained by him in res- pect 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 Commis- sioner 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 account- ing 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

The order continues below.

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