E.D. Sassoon and Company Ltd. v. Commissioner of Income Tax (1954)
Accrual of income needs a right to receive. Also, look at the real nature of trades—business or capital.
Quick Summary
This case teaches two simple things. First, income “accrues” only when you have a legal right to receive it. Second, to decide tax treatment, look at the real nature of the transaction. Here, profits from trades in silver bullion and shares were treated as business income, not capital receipts.
Issues
- Did income accrue or arise to the taxpayer?
- Was there a vested right to receive the amount?
Rules
Accrual Principle: Income does not accrue unless there is a present, enforceable right to receive the amount.
Character Principle: The true nature of the transaction—seen in the surrounding facts—decides whether a receipt is capital or revenue.
Facts (Timeline)
Arguments
Appellant (Company)
- Trades were investments, forming part of capital structure.
- Profits were capital receipts, not taxable as revenue.
- Accrual requires a right to receive; not established for some items.
Respondent (Revenue)
- Pattern shows business motive and regular activity.
- Profits are revenue income, taxable as business income.
- Where services/trades are complete, there is a vested right to receive—hence accrual.
Judgment
The Court held that the profits from the silver and share trades were taxable business income. The trades were part of the company’s regular operations and driven by profit-making. The Court also reiterated that income accrues only when there is a right to receive it. Where that right arises from completed business activity, accrual follows.
Ratio Decidendi
Accrual = Right to Receive. And the nature of repeated, profit-oriented trades points to business income, not capital receipts.
Why It Matters
- Clarifies when income accrues in law.
- Distinguishes business income from capital receipts using real-world conduct.
- Guides taxpayers dealing in commodities and shares.
Key Takeaways
- No right to receive, no accrual.
- Look at the pattern and purpose of trades.
- Regular, profit-driven trades → business income.
- Labels like “investment” are not conclusive.
Mnemonic + 3-Step Hook
Mnemonic: “Right First, Nature Next.”
- Step 1: Ask: Do we have a right to receive now?
- Step 2: Check the nature—business or capital?
- Step 3: Tax under the proper head: business if it is regular profit-making.
IRAC Outline
Issue: Whether income accrued and whether profits were business income or capital receipts.
Rule: Accrual requires a present right to receive; character depends on real nature of transactions.
Application: Trades in silver and shares were regular and profit-oriented; right to receive arose from completed dealings.
Conclusion: Profits were business income and taxable.
Glossary
- Accrue
- Income becomes due because there is a legal right to receive it.
- Capital Receipt
- Amount linked to capital structure or investment, usually not revenue in nature.
- Business Income
- Profits from regular, organized, profit-making activities.
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