BABULAL NAROTIAMDAS AND ORS.versusCOMMISSIONER OF INCOME-TAX, BOMBAY

                    BABULAL NAROTIAMDAS AND ORS.
                                                                                 A
                                          v.
                COMMISSIONER OF INCOME-TAX, BOMBAY

                               DECEMBER 14, 1990

                [P.B. SAWANT AND M. FATHIMA BEEVI, JJ.]                          B

             Income-Tax Act, 1922: Section 4-Right to receive extra remune-
        ration-Resolution authorising the payment challenged before Court-
        Resolution held Valid-Whether the right accrued from the date of
        Resolution or from date of judgment.

              The appellant-assessee was maintaining the Mercantile system of C
        accounting. He was the Managing Agent of a company and by way of a
        Resolution passed on 20.7.1949 the compay bad agreed to pay the
        appellant special additional remuneration at the rate of Rs.15,000 per
        annum. However, a representative suit was filed by the shareholders of
        the company for perpetual injunction from giving such extra remunera- D
        tion and for declaring the Resolution as illegal. Trial Court decreed the
        suit. On appeal, the High Court reversed the decree and held that the
        Resolution was validly passed. Though the company debited the sum of
        Rs.15,000 for the year ended 31.12.1949 and in the subsequent years
        showed the sum as contingent liability, the amounts were not paid to the
        assessee during the relevant years. After the death of the assessee on E
        16.11.1952, the amount due to him was paid to his heirs in 1956.

              A sum of Rs.15,000 each for assessment years 1950-51, 1951-52
        and 1952-53 and a proportionate sum of Rs.13,125 were brought to tax
        by the Income Tax Officer rejecting the contention of the assessee that
 ,·     no amount was doe as extra remuneration in the several years and that F
--+ ·   no income had accrued dnring the said years. On appeal, the Appellate
        Assistant Commissioner conrU"med the assessment. The assessee prefer-
        red an appeal to the Tribnnal. Setting aside the assessments, the Tri-
        bunal held 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 upholding the G
        Resolution, and not earlier.

             At the instance of Revenue, the Tribunal referred the question as
        regards the date of accrual, to the High Court.

             The High Court answered the reference in favour of Revence and H

                                         541
    542         SUPREME COURT REPORTS               [1990] Supp. 3 S.C.R.

A   against the assessee.

          Aggrieved by the judgment, the assessee preferred the present
    appeal contending inter alia that nntill the High Conrt rendered the
    judgment holding that the Resolution was validly passed, the company
    could not make any payment to the assessee nor could the assessee claim
B   payment of any extra remuneration from company and, in such a case,
    the entire amount became payable only on the date of judgment and
    could therefore, be properly brought to tax only in the year of the
    judgment.

          Dismissing the appeal, this Court
c         HELD: 1.1. The date of accrual is the date on which the right to
    receive the income has been acquired by the assessee. [54SG]

        1.2. In view of the Resolution passed in the annual general meet-
  ing of the company, income of Rs.15,000 accrued to the assessee In each
D year. This income was actually earned by him during the relevent pre-
  vious years. The right to receive the extra remuneration flowed from
  the Resolution. The income accrued or arose at the end of each account-
  ing year irrespective of the fact whether the amount was actually paid
  by the company to the assessee or not. Though the payment was defer-
  red on account of the pending litigation, it cannot be said that accrual of
E income was postponed simply because a suit was med by the share-
  holders challenging the validity of the Resolution passed by the
  company. [545D-F]

          E.D. Sassoon & Co. Ltd. v. C./. T., [1954] 26 ITR 27 and C./. T.
    v. K.R.M. T. T. Thiagaraja Chetty, [1953] 24 ITR525, relied on.
F
           2. In the instant case. 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 amonnt had
     become payable to the assessee by the company at the end of the
G accounting year. What was deferred on acconnt of the pending litiga-
     tion was not the accrual of the right but the date of payment. Since the
     snit was pending during the f°Irst year, the company had made the debit
     entry in the accounts. For the subsequent years also, the amonnt had        I-
     been shown in the profit and loss account as contingent liability in view
     of the pending litigation. There was not dispute between the company
1-1 and the assessee regarding the payment of such extra. remuneration.
                    BABULAL v. C.I.T, [FATHIMA BEEVI, J.]               543

    Since the Resolution created the right in favour of the assessee to
    receive the extra remuneration at the agreed rate, the assessee acquired   A
    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. [S46A-DI

          C.I. T. v. Babula! Narottamdas, [1976) 105 ITR 721, approved.
                                                                               B
          C.I. T. v. Hindusthan H & L Development Trust Ltd. Calcutta,
    [1977] 108 ITR 380, distinguished.

         CIVIL APPELLATE JURISDICTION: Civil Appeal No. 685
    (NT) of 1978.

        From the Judgment and Order dated the 8/9th July, 1975 of the          C
    Bombay High Court in Income Tax Reference No. 31of1966.

          P.H. Parekh for the Appellants.

          Ms. A. Subhashini for the Respondent.                                D

          The Judgment of the Court was delivered by

          FATHIMA BEEVI, J. 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 E
    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 on
    16.7.1949 for perpetual injunctiop from giving such extra remunera-
    tion and for declarin11 the Resolution as illegal. Temporary injunction
    granted by the trial court was dissolved on July 20, 1949, on the assu-
1   ranee that the company will not make payment of extra remuneration F
•   until the dispose! of the suit. The trial court decreed the suit on
i   31.10.1950 but on appeal, the High Court by judgment dated
    25.11.1955 reversed the decree and held that the Resolution was
    validly passed.

           Chandulal & Co. Ltd., debited the sum of Rs.15,000 in the profit G
    and Joss account prepared by it on 22.6.1950 for the year ended
    31.12.1949. For the later years, the company showed the sum of
    Rs. 15 ,000 due under the Resolution to the assesse.e as a contingent
    liability. The amounts were not paid to the assessee during the rele-
    vant years. Narottamdas died·on 16.11.1952. The amount of Rs.58, li5
    was ultimately paid to his heirs in 1956.                               H
    544         SUPREME COURT REPORTS                [1990] Supp. 3 S.C.R.

          The ·assessee was maintaining the Mercantile system of account-
A   ing. 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
B   income had accrued to the assessee during the said years. The Appel-
    late 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 this view of the matter, the assessments were set-
c   aside.

          At the instance of the Revenue, the Tribunal referred for the
    opinion of the High Court, the following question of law under s. 66( 1)
    of the Income-Tax Act, 1922:
D
                "Whether 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 Court's judgment was
                pronounced?"
E
          The High Court vide judgment dated 8/9. 7. 1975 answered the
    said question in the negative against the assessee. The judgment is
    reported in C.l.T. v. Babula/ Narottamdas, [1976] 105 l.T.R. 721
    (Bombay). The High Court held that as there was no question of any

F
    contorversy between the company on the one hand and the assessee on
    the other, merely because the third party raised a dispute as regards
                                                                                 f
    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 by 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 Court's judgment was pro-
G   nounced. The judgment of the High Court is challenged in this appeal.

         Shri Prashant Goswamy, learned counsel, appearing for the
    appellants centended that in view of the assurance given by the com-
    pany before court that no extra remuneration would be paid to the
    managing agent until the disposal of the suit and the subsequent dis-
H   missal of the suit by the trial court, it cannot be said that the right to
-
                    BABULAL v. C.I. T. [FATHIMA BEEVI, J .]              545

     receive the remuneration had accrued to the assessee in each year in
                                                                                A
     spite of the fact that a Resolution was passed on July 20, 1949. Accord-
     ing to the learned counsel, until the High Court rendered the judgment
     holding that the Resolution was validly passed, the company could not
     make any paymellt to the assessee nor could the assessee claim pay-
-r   ment of any extra remuneration from the company and, in such a case,
•
     the entire amount became payable. only on the date of judgment and         B
     could, therefore, be properly brought to tax only in the year of the
     judgment. Relying on the observations in C.I. T. v. Hindusthan H & I~
     Development Trust Ltd. Calcutta, (1977] 108 I.T.R. 380 Shri Goswamy
     maintained that the receipt of the extra remuneration was really the
     receipt of a particular sum pursuant to the decree of the court and the
     right to receive had accrued only when the decree was finally passed by
     the High Court.                                                            c
            The assessee; Narottamdas, was maintammg his account on
     Mercantile system. Where accounts are kept on accrual basis, profits
     or gains are credited though they are not actually realised. The entries
     made in the accounts really show nothing more than an accrual. In D
     view of the Resolution passed in the annual general meeting of the
     company, income of Rs.15,000 accrued to the assessee Narottamdas in
     each year. This incvme was actually earned by him during the relevant
     previous years. The right to receive the extra remuneration flowed
     from the Resolution. The income accrued or arose at the end of each
     accounting year irrespective of the fact whether the amount was actu- E
     ally paid by the company to Narottamdas or not. Though the payment
     was deferred on account of the pending litigation, it cannot be said
     that accrual of income was postponed simply because a suit was filed
     by the shareholders challenging the validity of the Resolution passed
     by the company. Income can be held to accrue when the assessee
     acquires a right to receive that income. In E.D. Sassoon & Co. Ltd. v. F
     C.I.T., (1954] 26 I.T.R. 27 the principie that income must be held to
     accrue on the date when a debt becomes due has been affirmed. In
     C.I. T. v. K.R.M. T. T. Thiagaraja Chetty, [1953] 24 I.T.R. 525 it was
     further held that the mere fact that an amount due to the assessee has
     been carried to the suspense account and company was withholding
     payment on account of a pending dispute cannot be held to mean that G
     the income has not accrued to the assessee. The date of accrual is the
     date on which the right to receive the income has been acquired by the
     assessee.

         The assessee herein has acquired the right to receive the extra
     remuneration of Rs. 15,000 per annum on the basis of the Resolution        H
    546         SUPREME COURT REPORTS               [1990] Supp. 3 S.C.R.
                                                                               •,
A passed on July 20, 1949. The right to receive extra remuneration can-
  not 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 litiga-
B tion 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.
c Since  the Resolution created the right in favour of the assessee to
  receive the extra remuneration at the aggreed 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
D to the assessee.

           In C./. T. v. Hindusthan H & L Development Trust Ltd. Calcutta,
    (supra) relied on by Shri Goswamy enhanced compensation fixed by
    the order of the Arbitrator was withdrawn by the assessee after
    furnishing a security bond during the pendency of the appeal in the
E   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
F   yet to be accepted by the court. We are unable to find any support
    from this decision to advance the appellant's claim, when the appel-
    lant's right to receive the extra remuneration was not unsettled.

          The High Court, in our view, was right in answering the question
    against the assessee. We find no merit in the appeal which is accord-
G   ingly dismissed. In the facts and circumstances of the case, we make no
    order as to costs.

    G.N.                                                 Appeal dismissed.