Commissioner Of Income-Tax, Punjab vs Jai Parkash Om Parkash Company Ltd.

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 26 November, 1963

Coram: A.K. Sarkar, J.C. Shah, M. Hidayatullah

In this case the Supreme Court recorded that the appeal was directed against the decision of the High Court of Punjab which had refused the appellant’s application under section 66(2) of the Income‑tax Act, 1922. The appellant, the Commissioner of Income‑Tax for the State of Punjab, sought an order requiring the Income‑tax Appellate Tribunal to refer a specific question to the High Court for determination. The question framed for the High Court was whether, on the facts and in the circumstances of the present case, the amount of Rs 94,253—or any portion of it—had accrued, arisen, could be deemed to have accrued or arisen, or had been received, or could be deemed to have been received by the assessee as income, profits and gains in the previous year. The Court indicated that it was prepared to allow the appeal. The factual backdrop was relatively straightforward. The assessee, Jai Parkash Om Parkash Company Ltd., had entered into a forward‑sale contract on 5 February 1952 for a specified quantity of mustard at a price of Rs 27‑8‑0 per maund. Subsequent market movements caused the price of mustard to fall, and the purchaser attempted to cancel the contract before the contractual due date of 7 June 1952. The assessee rejected the purchaser’s cancellation. On 28 February 1952 the assessee dispatched a telegram to the purchaser stating that, unless the purchaser responded within four hours confirming acceptance of a settlement at the rate of Rs 16‑14‑6 per maund, the assessee would deem the purchaser to have accepted settlement at that rate. The purchaser failed to reply, and the assessee consequently proceeded on the basis that a settlement had been reached at the reduced rate. Relying on that settlement, the assessee claimed Rs 74,253 from the purchaser, after offsetting a credit of Rs 20,000 that the purchaser owed the assessee under a separate account. When the purchaser did not satisfy the claim, the assessee instituted suit proceedings on 8 April 1952 for recovery of the amount claimed. The trial court decreed in favour of the assessee, and at the time the income‑tax assessment order was issued an appeal from that decree was pending before the High Court of Punjab. In the return filed for the relevant assessment year, the assessee appended a note stating that, according to its calculations, there existed a profit of Rs 1,09,072; that it had instituted a suit for Rs 75,000; and that, unless the suit were decided, the exact amount of profit could not be ascertained, and that the liability was admitted by “the company.” The Court clarified that the reference to “the company” denoted the purchaser. It was not contested that the assessee maintained its accounts on a mercantile basis. The Income‑tax Officer held that the existence of a pending appeal and the ongoing dispute with the purchaser did not preclude the income from having accrued. The Officer’s view was that the decisive factor was whether the transaction had been settled, and the assessment was therefore made on that basis.

The judgment recorded that the assessee had not denied that the transaction was settled and, in fact, had proceeded to the courts on the basis of such a settlement. The assessee first appealed the assessment to the Appellate Assistant Commissioner, but that appeal was dismissed. Subsequently, the assessee appealed to the Tribunal, which allowed the appeal and made a detailed observation. The Tribunal held that the Income‑tax Officer had taken the view that, because the assessee was maintaining its accounts on a mercantile basis and claimed that a sum of Rs 94,253 was due from the other contracting party, that amount necessarily constituted the assessee’s income for the relevant year of account. The Tribunal found this reasoning to be unsound and untenable, noting that the liability of the other contracting party remained in dispute. It further observed that income, profit or gain could be said to accrue to the assessee only when the assessee became indisputably entitled to the sum of Rs 94,253 or any other amount, and therefore the sum of Rs 94,253 was excluded from the assessment. After this decision, the Commissioner moved the Tribunal under section 66(1) of the Act, seeking a reference of the question earlier raised. The Tribunal replied that the department’s position appeared to be that a mere claim amounted to a right even though a dispute existed and no determination had been made; it added that even if the issue were purely legal, the answer was so obvious that it would not waste the court’s time by making such a reference. The Commissioner then approached the High Court under section 66(2), but his application was also rejected. Mahajan J observed that no amount could be said to accrue unless it was actually due, that a claim was not equivalent to an amount being due, and that only if the appeal were decided in the assessee’s favour would the amount accrue. The judgment noted that the learned judge was essentially answering the question that had been asked of him to direct the Tribunal to refer the matter, which was not the proper procedure. Khosla C.J. further observed that whether an entry made in the books related to profits accrued was a question of fact depending on the specific circumstances of each case. The judgment disagreed with this view, stating that the facts had already been established and that the sole remaining issue was one of law: whether, on those established facts, the income could be said to have accrued to the assessee. The learned Chief Justice had expressed agreement with Mahajan J’s view, but the judgment concluded that this agreement was incorrect.

In considering the matter, the Court observed that the view adopted by Mahajan J in refusing the application had been previously described by the Court as incorrect. The Court noted that the Commissioner had framed a question of law that necessarily arose from the Tribunal’s judgment. It further held that an application filed under section 66(2) of the Income‑Tax Act could not be disposed of merely by answering that legal question, and that this was precisely the error made by the learned judges of the High Court. Consequently, the Court concluded that the High Court had failed to address the proper procedure for dealing with the application, and therefore a fresh determination on the legal issue was required.

The Court also examined the arguments presented by counsel for the assessee, who relied upon the decision in Sree Meenakshi Mills Ltd. v. Commissioner of Income‑tax. Counsel argued that the question for which a reference was sought had already been settled by authority and that, under article 136, the Court should not order a reference. Counsel further cited Commissioner of Income‑tax v. Shoorji Vallabhdas and Co. as authority that the Tribunal had correctly answered the issue. The Court disagreed with this reliance, explaining that the Shoorji Vallabhdas case dealt with the interpretation of an agreement and did not consider whether, under the present circumstances, income could be said to have accrued. In that case, the Court had held that the parties’ agreement prevented the income from accruing and that a mere bookkeeping entry did not constitute an accrual of income. Accordingly, the Court found no justification for refusing to refer the question suggested by the Commissioner. It therefore set aside the High Court’s judgment, ordered the Tribunal to state a case, and directed that the identified question be referred to the High Court for a definitive decision. The Court also awarded costs to the appellant in both the present and the underlying proceedings, and it allowed the appeal.