Calcutta H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 59,194 did not accrue to the assessee by way of income during the relevant previous year for inclusion in the assessment for the asst. yr. 1970-71?

Counsel Appeared

A.N. Bhattacharyya, for the Revenue : Dr. D. Pal & A.K. Roy Chowdhury, for the Assessee

SATISH CHANDRA, C.J.:

The question referred to us in this reference relates to the asst. yr. 1970-71. The assessee is a company. It maintains accounts on the mercantile system. It appears that during the relevant accounting year, the assessee- company on August 14, 1968, entered into an agreement with India jute Co. Ltd. for purchasing 2,70,000, yards of D.W. Tarpaulin cloth of specific size, packed in specific manner, deliverable between October, 1968, to June, 1969. India jute Co. Ltd. failed to supply the aforesaid goods. The assessee-company sent a bill for damages for non-supply of goods amounting to Rs. 59,194. India jute Co. Ltd. repudiated the claim. The assessee-company then filed Suit No. 4117 of 1969 in the Calcutta High Court on December 10, 1969. The suit is still pending. The assessee claimed that this amount of Rs. 59,194 was not assessable as income because it had not been realised in the relevant assessment year nor was there any chance for the success of the claim. The ITO, however, repudiated this submission and added back this amount as income. The matter was taken up in appeal but the AAC upheld the addition. Before him, it was submitted on behalf of the assessee that the agreement between the parties was not in accordance with the Transferable Specific Delivery Rules of East India jute & Hessian Exchange Ltd. and in view of the Supreme Court decision in Megna Mills Co. Ltd. vs. Ashoka Marketing Ltd., AIR 1971 SC 166, the contract was void and unenforceable and hence it cannot be said that any income had accrued. This plea was repelled by the AAC on the following view: ” The contract was entered into through a recognised broker, Singhania Commercial Co. While making the claim for the difference, the appellant company must have been in the bona fide belief that the claim would be honoured by India jute Co. Ltd. and at that point of time, there was no legal dispute about the receivability of the difference. The appellant company should, therefore, have credited the profit and loss account with the difference receivable amounting to Rs. 59,194. The subsequent fate of this claim could be brought into the account books by way of claim of loss if the appellant company ultimately would lose in the law Courts.

The assessee then took the matter to the Tribunal in appeal. The Tribunal upheld the claim of the assessee and deleted this add back. It held that prima facie the implication of the decision of the Supreme Court in Megna Mills’ case, AIR 1971 SC 166, is that the assessee’s contract dated August 14, 1968, with India Jute Co. Ltd. was not enforceable. However, since the matter was sub judice before the High Court, they did not go into the merits of this aspect. It held that a mere claim does not give rise to accrual of income in the absence of any provision for damage or compensation in the contract. It was held that there was no such provision in the contract between the parties. Hence, this amount was not liable to be added back.

At the instance of the Department, the Tribunal has submitted this statement of the case and has referred the following question of law for the opinion of this Court :

” Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 59,194 did not accrue to the assessee by way of income during the relevant previous year for inclusion in the assessment for the asst. yr. 1970-71? “

The facts are not in dispute. Admittedly, the assessee-company entered into a contract with India Jute Co. Ltd. for supply of the stated quantity of tarpaulin cloth. The jute mill failed to make the supply. The assessee-company treated the breach of contract as actionable and sent a bill for damages. The jute mill, however, repudiated the claim. The contract between the parties was not entered into in accordance with the prescribed form and rules of the relevant stock exchange. In these circumstances, the decision of the Supreme Court in Megna Mills’ case, AIR

1971 SC 166, becomes applicable. In law, the contract was void ab initio. Breach of such a void contract cannot, in the eye of law, give rise to a cause of action toclaim damages. If, in law, the cause of action does not arise, it cannot be said that the liability to pay has accrued. In the mercantile system of accounting, the amount in question could be included on the credit side as income only if it had accrued, either in fact or in law. Mere effort on the part of the assessee-company to realise the amount by sending the bill or filing a suit for its recovery, will not, in law, make it an income which has accrued in the year in question. If the effort succeeded, then it could be said that the amount the assessee has actually received would be liable to be treated as its income during the year in which it was received. In such a case, the receipt would not be on the basis of any right vesting in the assessee-company under the contract, but on the basis of its actual receipt. It would be liable to be brought to tax in the year the money was actually received. Since the right to this amount did not arise or accrue at all, it could not be held that merely because the assessee followed the mercantile system of accounting, the income accrued in the year in which the breach of contract took place.

We, therefore, answer the question referred to us in the affirmative, in favour of the assessee and against the Department.

There will be no order as to costs.

MUKUL GOPAL MUKHERJI, J.:

I agree.

[Citation : 173 ITR 522]