Law:

Section:

Section 5, read with section 145(1) of the Income-tax Act, 1961 - Income - Accrual of - Assessee-company maintained accounts on mercantile system - During accounting year relevant to assessment year 1970-71, assessee entered into an agreement with company J for purchasing certain materials - Since J failed to supply said materials, assessee claimed Rs. 59,194 as damages though there was no provision for damages in agreement - J repudiated said claim - Assessee then filed a suit against J for recovery of said amount - During pendency of suit, ITO held that since assessee followed mercantile system of accounting, sum of Rs. 59,194 was its accrued income and was includible in total income of assessee for assessment year 1970-71 - On appeal, assessee contended that agreement was not entered in accordance with rules of relevant authority and as such it was void and unenforceable and, hence, it could not be said that any income accrued - Whether when in law, no cause of action could arise for claiming damages, merely because assessee had instituted a claim and followed mercantile system of accounting, it could be said that income had accrued to assessee from said claim - Held, no FACTS The assessee-company maintained accounts on mercantile system. During the accounting year relevant to the assessment year 1970-71, the assessee entered into an agreement with another company J for purchasing certain materials. On J failing to supply the said materials, the assessee sent it a bill of damages for non-supply of goods amounting to Rs. 59,194 although there was no provision in the agreement for damages. Since J repudiated the claim, the assessee filed a suit in the High Court on 10-12-1969, which was pending at the time of the assessee's assessment. The assessee claimed that the 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 of the success of the claim. It was further contended that the agreement between the parties was not in accordance with the rules prescribed by the relevant authority and, thus, was void and unenforceable. The ITO rejected the contention of the assessee and…

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