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 RN Sachthey for the appellant
K Rajinder Chaudhuri and KR Chaudhri for the res pondent
April 16
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 12447 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 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 12447 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 section 661 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 12447 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 12447 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
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 LPDISCI 25 770 should properly belong to it and the account should be re opened when the payment came in
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 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 vs Vazir Sultan  Sons1 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 SCR 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 section 4 1bi 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 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 vs The Commissioner of Income tax Bombay City1
In that decision this Court accepted the definition given to the words accrue and arise by Mukerji J in Rogers Pyatt Shellack  Co vs Secretary of State for India2 which is as follows   both the words are used in contradistinction to the word receive and indicate a right to 1   3421954  50
2  3711925 ILR LIPD ISCI 25a 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 ie 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 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 section 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
JP Hall  Co vs Commissioner of Inland Revenue1 is a decision of the Court of Appeal under section 38 of the Finance No 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 HM Inspector of Taxes vs Dadswell2
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 19211 2 774 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 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 section 41bi 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 UP vs Kalicharan Jagannath1 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 section 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 1 775 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 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


Summary:
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 vs Vazir Sultan  Sons 1959 Supp 2 SCR 375 followed
ii under the definition accepted by this Court of the word accrue or arise in section 41bi of the Indian Incometax Act an income accrues or arises when the assessee acquires a right to receive the same
section D Sassoon and Co Ltd vs Commissioner of Income tax Bombay City   followed
Rogers Pyatt Shellack  Co vs Secretary of State for India 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 section 41bi 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 and Severns H M Inspector of Taxes vs Dadawall 1954
 referred to
Commissioner of Income tax UP vs P V Kalicharan Jagannath  approved