The Judgment of the Court was delivered by

Dipak Kumar Sen, J.:— M/s. Bhartiya Steel Industries, Calcutta, the assessee, is an association of persons. Under a contract dated January 22, 1966, the assessee was regularly supplying railway sleepers to the Railways including the Eastern and the Central Railways. Under the terms of the contract, the assessee was entitled to increase the price of the sleepers on the increase in the cost of pig iron, the main raw material required for the manufacture of sleepers. The assessee claimed escalation in price in respect of the sleepers supplied during the assessment years 1966-67. and 1967-68, the accounting years ending on the Ram Navami day of the financial years 1966 and 1967. The claim of the assessee was accepted by the Railways and the escalation in price for the sleepers supplied was fixed for the said two assessment years. The Railway Board asked the assessee to submit supplementary bills in respect of the escalation in price as fixed.

2. During the assessment year 1968-69, the relevant accounting period ending on April 6, 1968, the assessee had submitted its supplementary bills for its additional claim on account of escalation in price aggregating Rs. 2,02,309 in respect of the sleepers supplied between June 28, 1967, and August 18, 1967. In the meantime, on December 9, 1966, the Railway Board informed the assessee that on account of late supply of sleepers, the assessee's claim would be reduced by Rs. 2,26,106. The assessee lodged a protest on which the Railway Board reduced its counter-claim from Rs. 2,26,106 to Rs. 73,731.09, but the assessee was informed that if it did not accept the counter-claim of the Railways, the assessee would be required to take back the sleepers supplied and that the Railway Board would refuse to pass the supplementary bills of the assessee. Subsequently, on February 15, 1968, the Railway Board informed the assessee that the payments withheld by the Railways would be released after a dispute in respect of the quantity of sleepers supplied by the assessee was settled in arbitration. Being aggrieved, the assessee moved this court on April 16, 1968, under article 226 of the Constitution against the Railway Board. On November 2, 1968, the Railway Board agreed to pay the claim of the assessee on account of escalation of prices less Rs. 73,731.09 on condition that the assessee withdrew the writ petition. The Board's claim of Rs. 73,731.09 against the assessee was referred to the Arbitration Committee. An award was passed in the arbitration in favour of the assessee on May 8, 1970, whereby the Railways were directed to pay to the assessee Rs. 71,637.

3. Against its supplementary bills, the assessee received payments from the Railways of Rs. 56,120 on January 16, 1969, Rs. 72,486 on March 26, 1969, and the balance Rs. 71,637 on December 16, 1970.

4. The assessee was assessed to income-tax in the assessment year 1968-69. In its return for the said year, the assessee did not include any income in respect of its claim on account of escalation in price as contained in its supplementary bills on the ground that the said amounts had been shown on receipt basis in the subsequent assessment years. The Income-tax Officer held that as the assessee followed the mercantile system of accounting and had submitted its bills in respect of escalation of price during the relevant accounting year, the entire amount of Rs. 2,02,309 was exigible to income-tax in the said assessment year.

5. Being aggrisved, the assessee preferred an appeal before the Appellate Assistant Commissioner who allowed the appeal and deleted the addition of the said amount of Rs. 2,02,309.

6. Being aggrieved, the Revenue went up in appeal before the Income-tax Appellate Tribunal. It was contended on behalf of the Revenue before the Tribunal that as the assessee followed the mercantile system of accounting, the said amount of Rs. 2,02,309 accrued to the assessee when the supplementary bills in respect of the tax were submitted during the accounting year. The counter-claim of the Railway Board on account of late supply, it was submitted, had to be considered separately and could not be connected with the supplementary bills of the assessee for the escalation in price.

7. It was contended on behalf of the assessee that even before the submission of its supplementary bills, the Railway Board had made a claim against the assessee on account of late supply of sleepers. The claims of the assessee and the Railway Board both arose under the same agreement and it was not reasonable to consider the claim of the assessee as distinct and separate from the claim of the Board. It was submitted that when the amounts were actually received by the assessee against its supplementary bills, the same were disclosed in the returns filed in the relevant assessment years. It was also submitted that no hypothetical income could accrue to the assessee and only the real income of the assessee was assessable.

8. The Tribunal accepted the case of the assessee and upheld the decision of the Appellate Assistant Commissioner. The Tribunal held that both the bills for escalation and the claim of the Railway Board on account of late supply of sleepers pertained to the same agreement and both the issues should be considered together. The Tribunal noted that unless the assessee accepted its liability arising out of late supply of sleepers, the Railway Board refused to pay anything to the assessee. The Tribunal held that the assessee had adopted the proper course and had disclosed its income on this account on actual receipt basis though the assessee was following the mercantile system of accounting.

9. On an application of the Revenue under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following questions as questions of law arising out of the order of the Tribunal for the opinion of this court:

“1. Whether, on the facts and in the circumstances of the case and in view of the fact that the method of accounting adopted by the assessee was the mercantile method and the fact that the supplementary bills were made at the rate accepted by the Railway authorities, the Tribunal was correct in law in holding that the sum of Rs. 2,02,309 representing the amount of supplementary bills was not liable to be included in the assessee's total income for the assessment year 1968-69?

(2) Without prejudice to question No. 1, Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the issue relating to the supplementary bills preferred by the assessee on account of the escalation in price and that relating to the claim of the Railway authorities on account of the alleged late supply of sleepers were inseparable and had to be considered together?”

10. At the hearing, the learned advocate for the Revenue contended that the assessee followed the mercantile system of accounting. As such, when the assessee preferred its claim under its supplementary bills on account of escalation of price, the amount claimed accrued during the relevant accounting year. The assessee, it was submitted, never gave up its claim under the said bills. In support of his contentions, the learned advocate for the Revenue cited the following decisions.

(a) E.M Muthappa Chettiar v. Income Tax Officer, Special Circle, Coimbatore , [1961] 41 ITR 1. In this case, one of the questions before the Supreme Court was whether the assessee was liable to pay excess profits tax in respect of its business income arising out of a managing agency. Under an agreement with another limited company, the assessee became entitled to remuneration for acting as managing agents of the former. The managed company had debited its account for such remuneration but did not disburse the same in cash and raised a dispute that the managing agents had not fulfilled certain obligations undertaken by them on account of which the managed company claimed to have suffered loss of income and made a counter-claim for damages. The Supreme Court held that the stand taken by the managed company would make no difference to the tax liability of the assessee as the accounts of the assessee were kept on mercantile basis.

(b) Vishnu Agencies Private Ltd. v. CIT, [1963] 48 ITR 444 (Bom). In this case, the assessee which maintained its accounts on the mercantile system acted as transport contractor to the Government for a limited period. For the work done, a sum had become due to the assessee during the relevant previous year and it had debited in its accounts the expenses incurred by it in connection with such work. The assessee, however, did not credit its account with the amount due from the Government on the ground that the Government had raised a dispute over the payment of its bills. The Government claimed deductions from the amount of the bills on account of damages for breach of contract on the part of the assessee. It was found by the Tribunal that the Government had not disputed the amount of the bills but had accepted the liability in full and only sought to withhold payment on the ground of breach of contract. It was held that the said amount had accrued to the assessee during the relevant accounting year. On a reference, it was held by the Bombay High Court that the said amount had accrued at the relevant time when the bills were accepted. It was held further that mere assertion of a claim on the part of the Government for damages for breach of contract was not sufficient to make the claim an enforceable one.

(c) James Finlay & Co. v. Commissioner Of Income-Tax., [1982] 137 ITR 698. In this case, a Division Bench of this court held that though there was difficulty on the part of the assessee to realise interest in the year of account, there was no material to show that there was an agreement with the debtors to waive the interest or to keep it in a suspense account. It was held that the assessee had not given up its claim for interest and the amounts of interest were includible in the total income of the assessee in the relevant assessment year and the amounts were assessable on accrual basis.

11. No one appeared on behalf of the assessee.

12. In the facts and circumstances, it appears to us that the bills of the assessee were not disputed by the Railways at any stage. The Railways, however, made a counter-claim under the said agreement on account of late supply of sleepers. This counter-claim was apparently on the basis of damages alleged to have been suffered by the Railways on account of late supply of sleepers by the assessee. The assessee did not give up its claim on the bills and ultimately succeeded in reducing the counter-claim of the Railways from Rs. 73,731.09 to Rs. 71,637.

13. It is not in dispute that the assessee kept its accounts on mercantile basis. Therefore, in the above facts, it has to be held that the supplementary bills of the assessee for escalation in price of the supplies accrued to the assessee in the relevant accounting year.

14. For the reasons as above, both the questions are answered in the negative and in favour of the Revenue. There will be no order as to costs.

Monjula Bose, J.:— I agree.