1969 PLP 87 (PTD)

5. The assessee was a partner with one Phalton Singh at Rourkela for supply of bricks to Hindustan Steel Ltd. According to the assessee the partnership suffered a loss and its share of loss therefrom amounted to Rs. 89,

440. The Income‑tax Officer and the Appellate Assistant Commissioner did not allow the loss on the ground that it was not proved. The assessment proceedings against the firm were still pend ing when the Tribunal passed its order. Before the Tribunal the assessee also raised the contention that it was entitled to set off its share of loss front the partnership with Phalton Singh against its other business become irrespective of the fact whether the firm was treated as registered or unregistered. This contention was overruled by the Tribunal which held that the assessee was not entitled to claim set‑off' its share of loss in an unregistered firm against its other income: The Tribunal gave no decision on the point regarding the quantum of the loss. The considerations which weighed with the Tribunal in arriving at the above finding are contained in paragraph 4 of its order (Annexure "C").

6. On the above facts the following question of law arises : "Whether, on the facts and in the circumstances of the case, the assessee is entitled in its individual assessment to claim that its share of loss in the partnership done with Phalton Singh be set off against its other business income irrespective of whether the partnership is registered or not under section 26‑A?" S. P. Mehta with Y. P. Trivedi and S. J. Mehta for the Assessee. G. N. Joshi with R. J. Joshi for the Commissioner. V. S. DESAI, J.‑This is a reference under section 66(1) of the Indian Income‑tax Act at the instance of the assessee. The assessee is a private limited company and, during the previous year relating to the assessment year 1956‑57, it acted as transport contractors for food-grains and fertilizers on behalf of the Government of India. Under the agreement, which the assessee had with the Government, it had to provide transport for transporting sugar from the docks to the sugar godowns. For the purpose of this work which the assessee had under taken to do, according to the assessee, the Government was to send it a programme of lifting up sugar from the docks, giving the quantity of weight to be lifted and the number of trucks required. After carrying out the work for sometime the assessee found that the Government were unable to provide the requisite load for the assessee's trucks. The assessee brought this fact to the notice of the Government and asked the Government to take suitable action in that connection, but no action was taken by the Government. The assessee thereupon intimated to the Government that it would not be possible for it to supply any more trucks until the Govern ment were able to arrange that the loading conditions were improved and that the assessee would also not be responsible for any port clearance rent and other charges as a result of non‑supply of trucks on its part. The system of accounts maintained by the assessee was the mercantile system. It had in its accounts debited all the expenses incurred by it in connection with the work it had done. For the. work which it had already done, a sum of Rs. 1,45,395 was due to it from the Government, but the assessee had not taken that amount to, the revenue account. The explanation given by the assessee .in that connec tion was that the Government had raised, a dispute with regard to the payment and the income therefore, could not be said to have accrued to it during the year of account. This contention was negatived by the income‑tax authorities and also by the Tribunal. The Tribunal found that in respect of the bills which had been submitted by the assessee to the Govern ment, the Government had accepted in full the liability and there was no dispute as regards the amount due to the assessee in respect of the work done. The reason for the withholding of pay ment on the part of the Government in respect the bills was because the Government asserted that there was a breach of the contract on the part of the assessee, and that they were therefore entitled to damages for breach of the contract, which they would be deducting from the payment due to the assessee in respect of the bills .for the work done by it. According to the Tribunal, the income of Rs. 1,45,395 had accrued to the assessee according to the mercantile system of accountancy which had been adopted by the assessee and the said income was liable to tax in the year of account. In the assessment of the assessee for the account year, there was also a dispute with regard to an amount of Rs. 89,440 which the assessee claimed as loss suffered by it in a partnership business which the assessee had carried on with one Phalton Singh at Rourkela. This claim was not allowed by the income‑tax authorities on the ground that the same was not proved. The assessment proceedings against the firm were still pending, and the question whether the firm would be allowed registration or 9t also was not decided till then. The assessee, however, contended before the Tribunal that whether the firm was registered or unregistered, it was in either case entitled to set off its shire of loss from the partnership business against its other business income. The contention was, however, overruled by the Tribunal. Thereafter, on the application of the assessee under section 65(1) the Tribunal drew up the statement of the case and referred to this Court two questions which arose on the disputes raised before it, which were "(l) Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,45,395 has accrued or arisen during the relevant previous year as the assessee's in come ? (2) Whether, on the facts and in the circumstances of the case, the assessee is entitled in its individual assessment to claim that its share of loss in the partnership done with Phalton Singh be set off against its other business income irrespective of whether the partnership is registered or not under section 26‑A ?" Since after this reference was made, the question of the registration of the partnership firm at Rourkela has been decided and the firm has been held to be a registered firm. In view of this fact, the decision of the second question has become necessary and the question therefore has not been pressed. We will, therefore, not proceed to deal with that question and answer it. Mr. Mehta, learned counsel for the assessee, has argued that on the facts and circumstances of the case, the sum of Rs. 1,45,395 cannot be said to have accrued or arisen to the assessee during the relevant previous year. He has argued that although the bills were submitted by the assessee in respect of the work done by it, the said bills have not yet been finally passed by the authorities and the income as claimed in the bills cannot therefore be said to have accrued to the assessee. He has in that connection invited our attention to a letter written by the Assistant Director (Food) to the Regional Director (Food) of Calcutta on 7th December, 1955, which is Annexure "A" to the statement of the case. In that letter, the Assistant Director had stated that he was returning along with that letter 205 transport bills of the assessee for carrying sugar in their trucks from the docks to the various godowns at Calcutta. The letter requested that the bills may be submitted direct to the Pay & Accounts Officer 'after deducting the amounts therefrom due to breach of contract as would be advised by the Ministry. It was further stated in the letter that while forwarding the bills to the Pay & Accounts Officer; transit loss certificate should be endorsed on the body of each bill. Now, we do not think that this letter supports Mr. Mehta's contention that the liability in respect of the work done by the assessee for the Government was not admitted by Government or that the amounts of the bills for the work done by the assessee for Government were in any way disputed by Government. As we have already stated, in the narration of facts which appear in the agreed statement of the case, there was no dispute with regard to the amount of work done by the assessee or the payment that was due to the assessee in respect of the work done. The assessee having found that the Government were not in a position to supply the requisite load for the trucks, had, after bringing the said fact to the notice of Government, discontinued doing any further work of transport for the Government, and the Govern ment treated this as breach of contract on the part of the assessee, and asserted that they would have a claim for damages against the assessee, and that they would be entitled to deduct the amount of damages from the payment due from them to the assessee in respect of the work done. It cannot, therefore, be said that the bills . submitted by . the assessee to Government in respect of the work done had not been. accepted by Government or that Government had not accepted their liability to make the payment to the assessee in respect thereof. The system of accounts maintained by the assessee being mercantile system, accrual of the income had no reference to the point of time when the pay ments were actually received by the assessee, but the accrual was when the bills were accepted and the liability in respect of the payment was accepted by Government. It appears, therefore, that the contention of Mr. Mehta that with holding of the payment by Government was because the liability for the payment was not accepted by Government is not correct. Mr. Mehta next argued that even though the amount of work done by the assessee for the Government was accepted by Government, and even though Government had accepted their liability to make payment in respect of that work, the amount of Rs. 1,45,395 in respect of the said work cannot be said to have accrued to the assessee because of the claim set up by Govern ment against that amount. Mr. Mehta argued that since the claim of Government was capable of being enforced and adjus ted against payment due to the assessee from Government, the entire amount could not be said to have been accrued to the assessee. Now, we do not think that a mere assertion of a claim by Government for damages for an alleged breach of contract on the part of the assessee is sufficient to make that claim an enfor ceable claim against the payment due to the assessee from Govern ment. Under the contract between the assessee and Government, the disputes relating to the contract, except where certain matters were left to be decided by Government themselves, were to be referred to arbitration. Whether there has been a breach of the contract entitling the other party to damages would be a matter under the contract to be referred t0 arbitration. Until, the dispute comes before the arbitrator and is decided by the arbitrator in favour of Govern ment, giving Government a right to claim damages, no enforceable claim can be sail to have arisen in favour of Govern ment, and no enforceable liability can be said to have been 'incurred by the assessee in respect thereof. It is undisputed that there has been no such adjudication of the claim of the Government for damages. It cannot, therefore, be said that the amount due from Government to the assessee in respect of the work done has pot accrued because of an enforceable claim against the said amount in favour of Government. In support of his submission that the claim sat up by Government against the amount due to the assessee from Government is an enforce able claim, Mr. Mehta has invited our attention to certain clauses of the agreement between the assessee and Government under which the decision of the Government is made final and binding on the assessee ; the claim asserted, however, is not referable to any of those clauses. The position according to us, therefore, is that the income has accrued to the assessee ; payment, however, has not been made because as against the said payment there is an assertion of a claim by Government. This mere assertion on the part of Government is not sufficient to affect the accrual, of the income to the assessee. In the view that we are taking therefore, our answer to the first question is in the affirmative. The assessee will pay the costs of the Department. Question answered in the affirmative.