Case: Babulal Narotfamdas And Ors Vs. Commissioner Of Income-Tax, Bombay

The assessee Seth Narottamdas was managing agent of M/s. Chandulal and Co. Ltd. A Resolution for the payment of special additional remuneration to Narottamdas at the rate of Rs 15, 000 per annum was passed on July 20, 1949. In the meantime, a representative suit was filed by the shareholders of the company of July 16, 1949 for perpetual injunction from giving such extra remuneration and for declaring the Resolution as illegal. Temporary injunction granted by the trial court was dissolved on July 20, 1949, on the assurance that the company will not make payment of extra remuneration until the disposal of the suit. The trial court decreed the suit on October 31, 1950 but on appeal, the High Court by judgment dated November 25, 1955 reversed the decree and held that the Resolution was validityChandulal & Co. Ltd., debited the sum of Rs 15, 000 in the profit and loss account prepared by it on June 22, 1950 for the year ended December 31, 1949. For the later years, the company showed the sum of Rs 15, 000 due under the Resolution to the assessee as a contingent liability. The amounts were not paid to the assessee during the relevant years. Narottamdas died on November 16, 1952. The amount of Rs 58, 125 was ultimate paid to his heirs inThe assessee was maintaining the mercantile system of accounting. The sum of Rs 15, 000 was brought to tax for each of the years 1950-51, 1951-52 and 1952-53. For the assessment year 1953-54, the proportionate sum of Rs 13, 125 was brought to tax. The Income Tax Officer in making the assessment rejected the contention that no amount was due as extra remuneration in the several years and that no income had accrued to the assessee during the said years. The Appellate Assistant Commissioner confirmed the assessment. The Appellate Tribunal, however, held the view that no income had accrued to the assessee during the said years and that the amount accrued to the assessee only in November 1955, when the High Court pronounced the judgment and till that date the amount could not be said to have accrued to him. In his view of the matter, the assessments were setAt the instance of the revenue, the Tribunal referred for the opinion of the High Court, the following question of law under Section 66(1) of the Income Tax Act,on the facts and in the circumstances of the case, the sum of Rs 58, 125 was properly held by the Tribunal to have accrued to Shri Narottamdas Jethalal only in November 1955, when the High Courts judgment was pronounced ?"The High Court vide judgment dated July 8/9, 1975 answered the said question in the negative against the assessee. The judgment is reported in CIT v. Babulal Narottamdas [ 1976 (105) ITR 721  The High Court held that as there was no question of any controversy between the company on the one hand and the assessee on the other, merely because the third party raised a dispute as regards the liability of the company to pay the amount, it could not be said that the date of accrual of such income was postponed to a future date when the rights were finally adjudicated upon a court of law and the Tribunal was not right in holding that the sum of Rs 58, 125 accrued only in November 1955, when the High Courts judgment was pronounced. The judgment of the High Court is challenged in this appeal

Reasoning: 8. The assessee herein has acquired the right to receive the extra remuneration of Rs 15, 000 per annum on the basis of the Resolution passed on July 20, 1949. The right to receive extra remuneration cannot be said to have arisen on the date of the judgment of the High Court. The right to receive the extra remuneration arose only on the Resolution of the company. In view of the Resolution, such amount had become payable to the assessee by the company at the end of the accounting year. What was deferred on account of the pending litigation was not the accrual of the right but the date of payment. Since the suit was pending during the first year, the company had made the debit entry in the accounts. For the subsequent years also, the amount had been shown in the profit and loss account as contingent liability in view of the pending litigation. There was no dispute between the company and the assessee regarding the payment of such extra remuneration. Since the Resolution created the right in favour of the assessee to receive the extra remuneration at the agreed rate, the assessee acquired the right to receive that income by virtue of the Resolution and not by virtue of the judgment which held the Resolution to be valid. There is, therefore, no force in the contention that until the suit was finally decided by the High Court, no right is said to have accrued to theIn CIT v. Hindusthan Housing and Land Development Trust Ltd., Calcutta [ 1977 (108) ITR 380 relied on by Shri Goswamy enhanced compensation fixed by the order of the arbitrator was withdrawn by the assessee after furnishing a severity bond during the pendency of the appeal in the High Court. The Income Tax Officer assessed the said amount as income of the assessee which had accrued in the relevant year. The High Court held that the receipt of the sum by the assessee was really receipt of a sum pursuant to an order of the court and was not income which accrued or arose during the relevant previous year for the reason that the right of the assessee to receive any further amount was yet to be accepted by the court. We are unable to find any support from this decision to advance the appellants claim, when the appellants right to receive the extra remuneration was notThe High Court, in our view, was right in answering the question against the assessee.