HON’BLE SUPREME COURT · SOURCE-REVIEWED NOTE
Commissioner of Income Tax, Madras v. A. Gajapathy Naidu
Civil Appeal No. 617 of 1963
[1964] 7 SCR 767 ·
Indian Income Tax Act, 1922: sections 4(1)(b)(i), 34, 35 and 66(1)
Sources & disclosures includedDownload original judgment / order
3-judge bench · K. Subba Rao, J. · J. C. Shah, J. · S. M. Sikri, J.
Assessment years: 1951-52
01 · Facts of the case
The assessee supplied bread to a government hospital under a 1948-49 contract and, using mercantile accounts, credited the contract price for that year. After the year closed, representations sought relief for the loss. By order dated 24 November 1950 the Government directed compensation of Rs. 12,447, which the assessee received in accounting year 1950-51. Revenue assessed it in assessment year 1951-52. The High Court agreed that it was a trade receipt but related it back to the earlier contract year despite finding that no right to the amount existed then (SCR pp.768–770; PDF pp.2–4).
Source: Primary judgment: facts
02 · Discussion by the Hon’ble Court
The Court held that the Indian Act had to be construed on its own language rather than by extending English account-reopening authorities. Under the accepted meaning of 'accrue' and 'arise', income accrues when a right to receive it comes into existence. For mercantile accounting, the relevant questions are the accounting method and the year when the enforceable right arose; no statutory fiction allowed a later-created right to be moved to the year of an earlier transaction (SCR pp.770–773; PDF pp.4–7). The English excess-profits cases did not control. The Court instead approved the Allahabad approach that an additional payment created by a later review order accrued when that order created the right, even though it concerned an earlier contract (SCR pp.773–775; PDF pp.7–9).
Source: Primary judgment: discussion
03 · Judicial decision
The Court allowed Revenue's appeal with costs, set aside the High Court's order and directed that the second referred question be answered in the affirmative. The compensation was properly assessed for assessment year 1951-52 (SCR p.775; PDF p.9).
Source: Primary judgment: decision
04 · Outcome / in whose favour
In favour of Revenue on timing. The later payment was assessable when the right arose and payment was made, rather than being related back to the earlier bread-supply year (SCR pp.774–775; PDF pp.8–9).
Source: Primary judgment: outcome
05 · AKHB REVIEW POINT
AKHB analysis: start with the assessee's accounting method and the instrument that creates the right to receive. Record the original contract, any review or escalation clause, the later sanction and payment dates, and whether the earlier year contained an enforceable entitlement. Do not shift income between years solely because a later payment is commercially connected with an older transaction; then separately verify the governing statutory regime for the actual year (based on SCR pp.770–775; PDF pp.4–9).
Source: Primary judgment: reviewPoint
Source & verification
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Statutory scope
The Court construed accrual under section 4(1)(b)(i) of the Indian Income Tax Act, 1922 for assessment year 1951-52. It did not undertake a present-law review of accrual, government compensation or income-computation provisions.
Later treatment
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