SHRI CHANDI RAM PROP M/S CHANDI andCO vs. THE INCOME TAX OFFICER
What did the High Court hold?
The High Court, in appeal No. 210/2017, held that the CIT(A) and Tribunal were correct in deleting the addition of Rs. 91,59,305/-. The Court noted that the Supreme Court in Ghanshyam (HUF) observed that receipt of enhanced compensation is liable to be taxed in the year of receipt, and in view of the DSL Enterprises (P) Ltd. case, the amount credited on the escalation head was rightly shown as a liability. The issue was considered squarely covered in favour of the assessee by paragraph 28 of the Ghanshyam (HUF) judgment. Consequently, the department's appeal (210/2017) was dismissed. Regarding appeal No. 10/2017, the Court stated that in view of the decision in appeal No. 210/2017, the issue was not being decided and it would be open for the assessee to agitate the issue by way of cross-objection before the Supreme Court if the department prefers an appeal.
What were the facts?
The assessee, Sh. Chandi Ram, filed a return of income for AY 2008-09. The assessment was completed under Section 143(3) at Rs. 7,55,353/-. Subsequently, the Assessing Officer (AO) noted that the assessee had received Rs. 91,59,305/- as arbitration receipts in FY 2007-08, which were not disclosed. The AO also observed that the assessee failed to deduct TDS on payments of Rs. 39,96,030/-, making it disallowable under Section 40(a)(ia). Proceedings under Section 147 were initiated, and a notice under Section 148 was issued on 29.3.2012. The department appealed an ITAT order that deleted the addition of Rs. 91,59,305/-. The assessee also appealed an ITAT order that dismissed their appeal.
What were the issues?
1. Whether on the facts, material available on record and in law the ld. ITAT was justified in holding that proceedings u/s 148 of the Act were validity initiated by the ld. Assessing Officer? (Assessee's appeal, ITA No. 10/2017) 2. Whether the tribunal was legally justified in deleting the addition of Rs.91,59,305/- made on account of amount actually received during the assessment year, as a result of Arbitration Award Passed in favour of the assessee specifically when the payment of such amount by the assessee is an unascertained and a contingent liability? (Department's appeal, ITA No. 210/2017) Assessee's Contention (for ITA 210/2017): The amount of Rs. 91,59,305/- was shown as a liability in the balance sheet under an escalation head and was not accrued. Reliance was placed on the Supreme Court decision in Commissioner of Income Tax vs. Ghanshyam (HUF) and Bombay High Court decision in DSL Enterprises (P) Ltd. vs. Mrs. N.C. Chandrate, ITO. Revenue's Contention (for ITA 210/2017): The Tribunal and CIT(A) erred in favour of the assessee. The revenue relied on instructions from the Supreme Court in Commissioner of Income Tax vs. Ghanshyam (HUF) and cited Sections 2(47), 45(1), and 45(5) of the Income Tax Act. The revenue argued that the amount was received and should be taxed.
Which sections of the Income-tax Act were involved?
Section 143(3),Section 147,Section 148,Section 40(a)(ia),Section 2(47),Section 45(1),Section 45(5),Section 155(16)
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
The question is : whether the judgment of this Court in Hindustan Housing (supra) would apply to the present case which arises under the Income-tax Act, 1961? At the outset, it may be noted that the judgment of this Court in Hindustan Housing (supra) was delivered on 29.7. 86. It was prior to 1.4.88 when Section 45(5) stood incorporated by Finance Act 1987 w.e.f. 1.4. 88. Further, the judgment of this Court in Hindustan Housing (supra) has been given in respect of assessment year 1956-57 under the Income-tax Act, 1922 whereas, in the present case, we are concerned with the 1961 Act which defines the word "transfer" in much wider sense
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under Section 2(47). Lastly, for the reasons given hereinafter, particularly in the context of introduction of Section 45(5) of the 1961 Act w.e.f.1.4.88 a totally new scheme stood introduced keeping in mind cases of compulsory acquisition under the 1894 Act under which compensation is payable at multiple stages and amounts stand withdrawn by the assessee- claimants and used by the assessee(s) for several years, during which litigation is pending. It is in the context of Section 45(5) that we need to decide the year of taxability. It is significant to note that Section 12B of 1922 Act did not contain specific reference to compulsory acquisition as contained in Section 2(47) of the 1961 Act. Therefore, in our view, the judgment of this Court in Hindustan Housing (supra) is not applicable to the present case.
From Section 45 it is clear that capital gains are not income accruing from day to day. It is deemed income which arises at a fixed point of time, viz, date of transfer. Section 45(5), newly inserted by the Finance Act, 1987, w.e.f. 1.4.88 and subsequently amended, retrospectively w.e.f. 1.4.88, by the Finance Act, 1991, enacts overriding provision and takes care of a situation - Where the capital gains arise from the transfer of a capital asset, being a transfer by way of compulsory acquisition and the compensation for such transfer stands enhanced in stages by any court, tribunal or authority. In such a situation, the capital gains so arising is, for and from assessment year 1988-89, has to be dealt with as under: (i) the capital gains computed with respect to the compensation awarded in the first instance would be chargeable as Income under the head "Capital Gains" of the previous year in which such compensation or part thereof was first received; and (ii) amount by which compensation or consideration is enhanced or further enhanced by the court, tribunal or authority is to be Deemed Income chargeable under the head "Capital Gains"
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of the previous year in which such amount is received by the assessee.”
1 She has also taken us to the decision of this court in TAX Appeal No.143/2012 (CIT, Kota vs. M/s. Mittal Borthers & Co.) decided on 12.9.2017 where while deciding the identical case, this court relied on the judgment of the Supreme Court in the case of Hindustan Housing and Ghanshyam (HUF) supra and held as under:- “11. He further contended that while considering the case, the tribunal has rightly held in favour of the assessee observing as under:- “After considering the orders of the AO and ld. CIT(A) we find that ld. CIT(A) has rightly deleted both the additions. As per District Curt order, Award was given in favour of the assessee for Rs.91,20,054/-. This award contains two items i.e. Rs.30,46,914/- for work+Rs.60,24,042/- for interest. It is a matter of fact that this award was awarded by District Court for a dispute of contract work which was related to assessment year 1981-82. The entire order of the District Court is challenged before the Hon’ble High Court. Copy of the award given by District Court as well as copy of petition filed by the Rajasthan Government before the Hon’ble High Court are placed on record. We further noted that even the AO himself admitted at page 4 of his order that the dispute is before Hon’ble High Court and it has been observed by AO that it will take years together and for this reason this income cannot be said that is not assessable in the year under consideration. It has been further mentioned by AO himself that if the Hon’ble High Court decided the issue against the assessee, then the assessee can seek relief in the year of decision. All these facts are mentioned in the order of the AO at page 4 as mentioned above. This is undisputed fact that entire award
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given by District Court has been challenged before the Hon’ble Rajasthan High Court which is pending and the ld. CIT(A) has examined this fact extensively and then only has held that neither any trading addition can be made nor any addition can be made on account of interest. For this purpose reliance is placed on the decision of Hon’ble Apex Court in case of Hindustan Housing and Land Development Trust Ltd, 161 ITR 524 (SC). For the sake of further clarification, the interest component is not the assessee has earned any interest income on account of principal award received by assessee which was deposited in the bank and interest income has accrued to the assessee. In fact, the District Court award was for Rs.91 lacs or odd which included the interest on the principal and this entire award has been challenged by the Rajasthan Government before the Hon’ble Rajasthan High Court. Therefore, the matter is under dispute. Since the matter is under dispute, no addition can be made in the year under consideration in the hands of the assessee as held by the Hon’ble Apex Court (supra). In view of these facts and circumstances and in view of the detailed reasoning given by the ld. CIT(A), we confirm his order.”
However taking into account that the carry forward loss was not there and in view of the decision of the Supreme Court in Ghayshyam (supra) as reproduced herein above, we are of the view that the interest actually received was income.
We restore the order of the AO and the order of CIT(A) and order of the tribunal is quashed and set aside.
It is made clear that ultimately assessee will make payment in case he lost before the court the same will be treated as set off expenses.
Counsel for appellant contended that in view of the provision of Section 155 (16) of the Income Tax Act which reads as under:- “155…….
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(16) Where in the assessment for any year, a capital gain arising from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer, the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, is computed by taking the compensation or consideration as referred to in clause (a) or, as the case may be, the compensation or consideration enhanced or further enhanced as referred to in clause (b) of sub-section (5) of section 45, to be the full value of consideration deemed to be received or accruing as a result of the transfer of the asset
and subsequently
such compensationor consideration is reduced by any court, Tribunal or other authority, the Assessing Officer shall amend the order of assessment so as to compute the capital gain by taking the compensation or consideration as so reduced by the court, Tribunal or any other authority to be the full value of consideration; and the provisions of section 154 shall, so far as may be, apply thereto, and the period of four years shall be reckoned from the end of the previous year in which the order reducing the compensation was passed by the court, Tribunal or other authority.”
Counsel for the respondent Mr. Ranka has relied upon the following decisions:-
1 In Commissioner of Income Tax, West Bengal-II, Calcutta vs. Hindustan Housing and Land Development Trust Ltd. (1986)161 ITR 524 (SC), it has been held as under:-
During the assessment proceedings for the assessment year 1956-57, the relevant accounting period being the year ended March 31, 1956 the Income Tax Officer brought to tax a sum of Rs. 7,24,914 in the assessee's business income. This (13 of 40) [ITA-10/2017]
represented the difference between the sum of Rs. 7,37,190 payable to the assessee in terms of the award dated July 29, 1956 of the Arbitrator and a sum of Rs. 12,276 out of that amount which had already been assessed to tax. The Income tax Officer treated the sum as liable to income-tax during that year on the basis that the income accrued to the assessee on the date of the award. The assessment was confirmed by the Appellate Assistant Commissioner of Income-tax on first appeal. In second appeal by the assessee before the Income-tax Appellate Tribunal, two contentions were raised by it. It was urged that the amount of compensation received by the assessee was not a receipt of a revenue nature. It was also contended that in any event the amount did not accrue to the assessee as its income during the relevant previous year ended March 31, 1956. The Appellate Tribunal rejected the first contention and held that the compensation received by the assessee related to the acquisition of land which was the stock-in-trade of the assessee, and was, therefore, a trading receipt of the business carried on by the assessee, and therefore, a receipt of a revenue nature liable to tax. The Appellate Tribunal, however, accepted the other contention that the sum of Rs. 7,24,914 was not taxable in the assessment year 1956-57. It allowed the appeal accordingly by its order dated February 22, 1964. At the instance of the Revenue the Appellate Tribunal referred the question of law set out earlier to the Calcutta High Court for its opinion, and by its judgment dated January 9, 1973 the High Court answered the question in favour of the assessee and against the Revenue.
The question raised in this appeal is limited to the point whether on the facts and circumstances of the case the Revenue can claim that the sum of Rs. 7,24,914 payable to the assessee as compensation can be said to have accrued to it as income during the previous year ended March 31, 1956 relevant to the assessment year
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1956-57. Now as long ago as E.D. Sassoon and Company Ltd. and Ors. v. Commissioner of Income-tax, Bombay City [1954]26ITR27(SC) this Court considered the question as to the point at which income could be said to accrue or arise to an assessee for the purpose of the Indian Income Tax Act. In the majority judgment delivered by N.H. Bhagwati, J. it was explained that the words "arising or accruing" describe a right to receive profits, and that there must be a debt owed by some body. "Unless and until there is created in favour of the assessee a debt due by somebody", it was observed "it cannot be said that he has acquired a right to receive the income or the income has accrued to him". In the present case, although the award was made by the Arbitrator on July 29, 1955 enhancing the amount of compensation payable to the assessee, the entire amount was in dispute in the appeal filed by the State Government. Indeed, the dispute was regarded by the Court as real and substantial, because the assessee was not permitted to withdraw the sum of Rs. 7,36,691 deposited by the State Government on April 25, 1956 without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal was allowed in its entirety the right to payment of the enhanced compensation would have fallen altogether. This is a case which must be distinguished from that decided by this Court in Kedarnath Jute Mfg. Co. Limited, v. Commissioner of Income-Tax
(Central),
Calcutta
: [1971]82ITR363(SC) where the liability to sales tax arose immediately on a dealer affecting sales which were subject to sales tax and what remained to be done was a mere quantification of that liability. The case compares rather with Commissioner of Income-tax v. Jai Parkash Om Parkash Co. Ltd. The very foundation of the claim made by the assessee was in serious jeopardy and nothing would be due if the appeal was decided against the assessee. Our attention has been drawn by the (15 of 40) [ITA-10/2017]
Revenue to Pope The King Match Factory v. Commissioner
of Income-tax
: [1963]50ITR495(Mad) . That case, however, proceeded on the basis that excise duty was payable and its quantification alone remained to be decided in the appeal. We may point out that the Andhra Pradesh High Court, dealing with the taxability of compensation received under the Land Acquisition Act in Khan Bahadur Ahmed Alladin & Sons v. Commissioner
of Income-tax
: [1969]74ITR651(AP) held that when land was taken over by the Government the right of the owner to compensation was an inchoate right until the compensation had been actually determined and had become payable. It was observed that the enhanced compensation accrued to an assessee only when the Court accepted the claim and not when the land was taken over by the Government. Examining the question whether income could be said to have accrued to the assessee on the date when possession of the land was taken by the Government for the purpose of assessment to tax in the year of assessment P. Jaganmohan Reddy, C.J., speaking for the Court, said: If the actual amount of compensation has not been fixed, no income could accrue to him. It cannot be contended that the mere claim by the assessee, after taking of possession, at a particular rate or for a certain sum is the compensation. It is the amount actually awarded by the Collector or subsequently decreed by the court which accrues to him, and the respective amounts, whether awarded by the Collector or the court accrue on the respective dates on which the award or the decree is passed. Income-tax is not levied on a mere right to receive compensation; there must be something tangible, something in the nature of a debt, something in the nature of an obligation to pay an ascertained amount. Till such time, no income can be said to have accrued.... On the date when the Collector awarded the compensation, it is only that amount
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which had accrued or deemed to accrue, whether in fact paid or not. But by no stretch of the words in Section 4(1)(b)(i), could it be said that the right to enhanced compensation, which has not yet been accepted by the proper forum, namely, the court, has become payable on the date when the original compensation became payable, for being included in that year of assessment. The enhanced compensation accrues only when it becomes payable, i.e., when the court accepts the claim. As has been stated earlier, a mere claim by the assessee, after taking of possession of the land, at a particular rate or for a certain sum is not compensation. It must not be forgotten that, even if a court was awarded enhanced compensation, there is a right of appeal by the Government to the High Court, and the High Court may either disallow that claim or reduce the compensation. As against that judgment, there is further right of appeal to the Supreme Court. The assessee also can appeal against the insufficiency of the enhanced compensation. Can it be said that the final determination by the highest court of the compensation would entitle the Income-tax Officer, notwithstanding the period of limitation fixed under the Income-tax Act, to reopen the assessment in which he had included the initial compensation awarded by the Collector and recompute the entire income on the basis of the final compensation? We do not think there can be any justification for such a proposition. On a proper construction of the terms 'accrue' or 'arise', we are of the view that such an interpretation cannot be placed. The interpretation given by us does not affect the interests of the revenue. At the same time, it safeguards the assessee and prevents harassment. To hold otherwise would be contrary to the provisions of law. The legal position was explained in further detail by the Gujarat High Court in Topandas Kundanmal v. Commissioner of Income-tax,
Gujarat
: [1978]114ITR237(Guj) . The High Court
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was called upon to decide without the right to receive the enhanced compensation under the Land Acquisition Act accrued or arose to the assessee when he sought a reference under Section 18 of the Act or when the award was made by the Civil Judge although an appeal was pending against that award. The learned Judges referred to the nature of an award made by the Collector, and adverting to the opinion of this Court in Harish Chandra Raj Singh v. The Deputy Land Acquisition Officer and Anr. : [1962]1SCR676 that the award made by the Collector was merely an offer or tender of the compensation determined by the Collector to the owner of the property on the acquisition, the High Court observed: ... the legal position which emerges is that there is no liability in praesenti to pay an enhanced compensation till it is judicially determined by the final court since the entire question, namely, whether the offer made by the Land Acquisition Officer is inadequate and the claimant is entitled to an additional compensation and if yes, at what rate is in flux till the question is set at rest finally, we do not think that any enforceable right to a particular amount of compensation arises. The offer made by Land Acquisition Officer, by his award, if not accepted by a claimant would not result automatically in a liability to pay additional compensation as claimed by party aggrieved. There is no doubt a liability to pay compensation as offered by the Land Acquisition Officer. But that is far from saying that liability is a liability to pay additional compensation or enhanced compensation as claimed by a party aggrieved. If there is an existing liability, the mere fact that the payment is postponed to the future would not detract that liability from becoming a debt but the liability to pay unliquidated damages or additional compensation which are inchoate or contingent would not create a debt.
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Khan Bahadur Ahmed Alladin & Sons (supra) and Topandas Kundanmal (supra) were relied on by the Gujarat High Court in Additional Commissioner of Income-tax, Gujarat v. New Jehangir Vakil Mills Co. Ltd.
:
[1979]117ITR849(Guj) Anr. (PATNAHC) [1999] 237 ITR 288 it has been held as under :-
I am of the opinion that this writ petition is fit to be allowed on the basis of the first point urged by Mr. Moitra which is fully supported by the decision of the Supreme Court in CIT v. Hindustan Housing and Land Development Trust Limited: [1986]161ITR524(SC) . The case of Hindustan Housing was very similar to the facts of the case in hand and in that case the Supreme Court held as follows (page 527) : "In the present case, although the award was made by the arbitrator on July
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29, 1955, enhancing the amount of compensation payable to the assessee, the entire amount was in dispute in the appeal filed by the State Government. Indeed, the dispute was regarded by the court as real and substantial, because the assessee was not permitted to withdraw the sum of Rs. 7,36,691 deposited by the State Government on April 25, 1956, without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal was allowed in its entirety, the right to payment of the enhanced compensation would have fallen altogether."
The Revenue overlooks the fact that at that time the amount of Rs. 13,48,945 as the total value of the work done was simply the claim of the petitioner which was not being accepted by BCCL and at that stage the petitioner had no means to know definitely as to what extent its claim would be allowed by the arbitrator/the trial court and would be finally sustained by the higher courts. The petitioner, therefore, could not reckon that amount or any part of it as income accrued in that year.
It may further be noted that Mr. Jhunjhunwala, counsel for the Revenue, laid great stress that the petitioner maintained its account on the mercantile system and, therefore, that amount must be deemed to be the income in that year. The point concerning mercantile system of accounts is to be simply rejected and suffice it to point out in that regard that the assessee in the case of Hindustan Housing : [1986]161ITR524(SC) , also maintained its account on the mercantile system and it was in that back ground that the Supreme Court made the above quoted observations.
As I have found that this writ petition is fit to succeed on the merits, I need not go into the other point raised by Mr. Moitra
(20 of 40) [ITA-10/2017] Dhamija (DELHC) [2016] 382 ITR 343 it has been held as under :-
The upshot of the above discussion is that but for the proceedings under Section 31(2) of the LA Act still being inconclusive, the amounts received by the Assessee by way of enhanced compensation would have been amenable to capital gains tax in the year of receipt as explained in CIT v. Ghanshyam (HUF) (supra). However, on account of the pendency in this Court of the appeals arising from the order of the ADJ in the proceedings under Section 31(2) of the LA Act, the right of the Assessee to receive the said sums is still unclear or inchoate. Consequently, the question of bringing to tax the said enhanced compensation has to await the final outcome of the above proceedings. This would equally apply to the interest, solatium, additional sums received by the assessee on enhanced compensation in the AYs in question. A further corollary is that the stage for applying Section 45 (5) (c) read with Section 155 (16) of the Act cannot be said to have arisen yet. Consequently, that question need not be examined at this stage. Section 45(5) effective from AY 1988-89
Turning to the wealth tax appeals, it is seen that as held by the ITAT in the present case, amount of compensation received by the Assessee in the nature of 'trust money' which may be required to be returned by the Assessee in case she does not succeed in the appeal emanating from the order in the proceedings under Section 31(2) of the LA Act. For an Assessee to be brought to tax within the ambit of the (21 of 40) [ITA-10/2017] been held as under :-
The crux of the issue is, whether the enhanced award pronounced by the arbitrator and the dispute in question, had not attained finality, can it be brought to tax under the tax net during the period in which the amounts were received by way of an interim order? Reliance is placed on several judgments of the Apex Court, as well as this court. All those cases are dealing with acquisition of land and payment of compensation and the matter is pending in appeal against such orders. But the principle which emerges from a reading of the aforesaid judgment is, income tax is not levied on a mere right to receive compensation. There must be something tangible, something in the nature of a debt, something in the nature of an obligation to pay an ascertained amount. Till such time, no income can be said to have accrued. The enhanced compensation accrues only when it becomes payable i.e., when the court accepts the claim. It is also pointed out in the judgment of the Apex Court in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. : [1986] 161 ITR 524/27 Taxman 450A, as under: "It must not be forgotten that, even if a court
has awarded
enhanced compensation, there is a right of appeal by the Government to the High Court, and the (22 of 40) [ITA-10/2017]
High Court may either disallow that claim or reduce the compensation. As against that judgment, there is a further right of appeal to the Supreme Court. The assessee also can appeal against the insufficiency
of the enhanced compensation. Can it be said that the final determination by the highest court of the compensation would entitle the Income-tax Officer, notwithstanding the period of limitation fixed under the Income-tax Act, to reopen the assessment in which he had included the initial compensation awarded by the Collector and recomputed the entire income on the basis of the final compensation? We do not think there can be any justification for such a proposition. On a proper construction of the terms 'accrue' or 'arise', we are of the view that such an interpretation cannot be placed. The interpretation given by us does not affect the interests of the Revenue. At the same time, it safeguards the assessee and prevents harassment. To hold otherwise would be contrary to the provisions of law."
Therefore, what emerges from the aforesaid judgment is, when an assessee receives money, either under an award or by a decree of the court, or under an award passed by the arbitrator, if the amount paid to him is not in dispute, then that amount represents his income. He should offer it to tax in the previous year of the date of payment of the said amount. But if the amount due to him is in dispute and it is subject-matter of a litigation and during the pendency of the litigation, if any interim order is made for payment of the said amount, the said payment is subject to the final result of the said proceedings. In the event the assessee looses the legal battle, the amount received by way of interim payment, has to be repaid. The amount to which he is entitled to, out of the disputed amount, would crystallize only when the litigation ends and payment is made after the finality of the litigation, then that amount is to be offered to tax in the previous year of the date of payment. Merely because by virtue of an interim
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order, with or without conditions, some payment is made for the purpose of Income-tax Act, it would not constitute Income Tax Officer, TDS-I, Nasik & Ors. (BOMHC) [2013] 355 ITR 209 it has been held as under :-
The facts which have been narrated in the earlier part of the judgment would indicate that the challenge to the arbitral award is pending in appeal and the award is yet to attain finality. Though the Learned Single Judge of this Court dismissed a Petition filed by MSEDC challenging the arbitral award, the appeal filed by MSEDC has been admitted. A Division Bench of this Court granted a stay on the execution of the award subject to MSEDC depositing an amount of Rs. 179 crores and furnishing a Bank Guarantee for Rs. 86 crores. This order was modified in appeal by the Supreme Court. Under the order of the Supreme Court, MSEDC was required to deposit Rs. 65 crores and DSL was permitted to withdraw the amount so deposited subject to furnishing a Bank Guarantee to the satisfaction of the Prothonotary
&
Senior
Master. Consequently, there can be no manner of dispute even as a matter of first principle, about the fact that the amount of Rs. 65 crores which was permitted to be withdrawn against a bank guarantee for an equivalent amount does not represent income which has accrued to DSL. So long as the challenge to the arbitral award is alive and is pending, and the legality of the arbitral award has not attained finality, the (24 of 40) [ITA-10/2017]
amount which has been awarded does not represent income which has accrued. Upon the withdrawal of the amount by DSL, the amount has been invested in a fixed deposit of Indian Bank which has marked a lien to the extent of Rs. 65 crores; this corresponds to the amount of the Bank Guarantee which it has furnished. The interest which has accrued on the amount of the fixed deposit cannot be regarded at this stage as income which has accrued to the Petitioner. In view of the provisions of Section 144 of the Code of Civil Procedure, 1908, if the decree in terms of the award is varied or reversed in appeal, the Court which passed the decree or order is under a mandate on the application of any party entitled to any benefit by way of restitution or otherwise to cause such restitution to be made so as to place the parties in the position which they would have occupied but for such decree or order. The Court is empowered to make any orders including orders for the refund of costs and for the payment of interest.
Under the Income Tax Act, 1961, income chargeable to tax is income that is received or is deemed to be received in India in the previous year relevant to the year in which assessment is made or the income that accrues or arises or is being accrued in India during such year. In CIT vs. Shoorji Vallabhdas and Co. : (1962) 46 ITR 144 the Supreme Court held that "the substance of the matter is the income". Similarly in Poona Electric Supply Co. Ltd. vs. CIT,: (1965) 57 ITR 521 the Supreme Court held that "Income-tax is a tax on the real income i.e., the profits arrived at on commercial principles subject to the provisions of the Income Tax Act.". These principles were followed by the Supreme Court in the judgment in Godhra Electricity Co. Ltd. vs. Commissioner of Income Tax, : (1997) 225 ITR 746 in holding that even though the assessee was following a mercantile system of accounting and had made entries in its books regarding enhanced charges for the electric supply made to the consumers, no real income
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had accrued in respect of those enhanced charges in view of the fact that soon thereafter the assessee had been subjected to litigation in a suit filed by the consumers. The Supreme Court held that "the question whether there was real accrual of income to the assessee-company in respect of enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner". The Supreme Court held that the claim at increased rates on the basis of which necessary entries were made represented only hypothetical income and the amounts as brought to tax by the Income Tax Officer did not represent the income which had really accrued to the assessee- company during the relevant previous years". In Commissioner of Income Tax vs. Hindustan Housing and Land Development Trust Ltd. : (1986) 61 ITR 524 the Supreme Court cited with approval the following principle laid down in Khan Bahaddur Ahmed Alladin & Sons vs. C.I.T.: (1969) 74 ITR 651. Income-tax is not levied on a mere right to receive compensation; there must be something tangible, something in the nature of a debt, something in the nature of an obligation to pay an ascertained amount. Till such time, no income can be said to have accrued....
The submission of the Revenue is that the order of the Supreme Court only required the Petitioner to furnish a Bank Guarantee of Rs. 65 crores in respect of the amount which was deposited by the MSEDC and withdrawn. However, it is urged that there was no direction in regard to the interest which would accrue on the amount of Rs. 65 crores and there is no link as such between the fixed deposit upon which interest has been earned and the Bank Guarantee which was required to be furnished for the withdrawal of Rs. 65 crores. In our view, it would not be possible to accede to the submission for the simple reason that the interest on the (26 of 40) [ITA-10/2017]
fixed deposit does not represent a crystallised entitlement of the Petitioner during the financial year in question. The Petitioner would have an indefeasible entitlement in respect of the principal amount of Rs. 65 crores as well as the interest earned only if the proceedings which are pending in regard to the challenge to the arbitral award conclude in its favour. Unless those proceedings attain finality, the Petitioner would be subject to a possible order of restitution not merely in respect of the principal amount of Rs. 65 crores, but also the interest which has been generated on the amount withdrawn in view of the mandate of Section 144 of the Code of Civil Procedure, 1908 to provide restitution if a decree is modified in appeal. In that view of the matter, it would be wholly unreasonable to deduct tax at source on an amount which has not accrued to the Petitioner as income during the financial year in question, the entitlement of the Petitioner being contingent on the outcome of the challenge to the arbitral award. Moreover, it has also not been disputed on behalf of the Petitioner and it is fairly conceded by Counsel for the Petitioner that if the challenge to the arbitral award ends in favour of the Petitioner, the Revenue would be entitled to bring to tax the amount accrued in the corresponding year. For these reasons we are of the view that the ITO (TDS-I), Nashik was not justified in denying a certificate under Section 197 despite the fact that such a certificate has been issued earlier for three preceding F.Ys. 2009-10, 2010-11 and 2011-12. Having regard to the several orders of remand that have been passed by the Court on two previous occasions, no useful purpose will be served by a further order of remand. No other objection to the grant of a certificate under Section 197 has been asserted on behalf of the Revenue at the hearing. We accordingly make the rule absolute by directing the First Respondent to issue a certificate under Section 197 for financial year 2012-13. Rule is made absolute in these terms. There shall be no order as to costs.
(27 of 40) [ITA-10/2017]
6 [2010] 326 ITR 444, it has been held as under :-
The learned Commissioner had held in favour of the appellant that no real income had accrued in favour of the assessee relying on the judgment in Godhra Electricity
Co.
Ltd.
v.
CIT
: [1997]225ITR746(SC) . The revenue aggrieved, preferred an appeal. The assessee relied on the judgment of the Supreme Court in Godhra Electricity Co. Ltd. v. CIT (supra). The Tribunal distinguished the said judgment on the ground that on the facts it was not applicable and consequently allowed the appeal preferred by the revenue by holding that once the assessee adopted the mercantile system even if the amount is not received, it will be taxable in assessment year for which it was payable. Hence, the present appeal.
The Apex Court in Godhra Electricity Co. Ltd. (supra) has laid down the test to assess income in the hands of an assessee. The assessee therein was also following the mercantile system of accounting and had made entries in the books regarding electrical charges for the supply made to the consumers, however, no real income had accrued to the assessee company. The Tribunal had held that it represented hypothetical income and the assessing officer was not right in assessing it to tax. Before the Supreme Court it was urged that even in case of mercantile system of accounting, tax can only be imposed if there is real income and Income Tax cannot be imposed on hypothetical income. The court held even in mercantile system what has to be seen is whether income can be said to have really accrued to the assessee company. The court referred to the judgment of the Court in H.M. Kashiparekh & Co. Ltd. v. CIT : [1960]39ITR706(Bom) which view was (28 of 40) [ITA-10/2017]
approved by the Supreme Court in CIT v. Birla Gwalior (P) Ltd.: [1973]89ITR266(SC) . What can therefore, be assessed is real (Pvt.) Ltd. (DELHC) [2008] 301 ITR 443, it was held as under :-
On a reading of the interim orders passed by the Madhya Pradesh High Court on 14th October, 1996 and 13th December, 1996, it is quite clear that the assessed had no right to receive the money in the sense that no right had accrued or vested in the assessed in this regard. In the event SECL succeeded in the appeal filed by it, the assessed was obliged to return the amount by way of restitution under Section 144 of the Code of Civil Procedure.
A somewhat similar situation had arisen in Hindustan Housing. In that case, the lands belonging to the assessed were requisitioned and then acquired by the State Government. The issue of compensation was required to be adjudicated by the Calcutta High Court as a result of an appeal preferred by the State Government. Pending the appeal, the State Government deposited some amounts payable under the Award made under the provisions of the Requisition of Land (Continuance of Powers) Act, 1951. The assessed was permitted by the High Court to withdraw the amount on furnishing a security and the assessed did withdraw the amount and credited it in its suspense account. The question that arose before the Supreme Court was whether the Revenue could claim that the amount payable to the assessed as compensation could be said to have accrued to it as income during the relevant previous year. While answering this in the negative and (29 of 40) [ITA-10/2017]
accepting the contention of the assessed, it was held that the assessed had no absolute right to receive the amount pending the appeal, since it was allowed by the High Court to withdraw the amount deposited by the State Government only on furnishing a security for refunding the amount in the event of the appeal filed by the State Government being allowed. Secondly, if the appeal was allowed in its entirety, the right to payment of the enhanced compensation would have fallen altogether. It was further held, approving the decision of the Andhra Pradesh High Court in Khan Bahadur Ahmed Alladin & Sons v. Commissioner of Income Tax: [1969]74ITR651(AP) that the right to receive compensation was an inchoate right and the enhanced compensation would accrue to the assessed only when the Court accepted its claim. The Supreme Court also made a reference to two decisions of the Gujarat High Court, namely, Topandas Kundanmal v. Commissioner of Income Tax, Gujarat : [1978]114ITR237(Guj) and Additional Commissioner of Income Tax, Gujarat v. New Jehangir Vakil Mills Co. Ltd. : [1979]117ITR849(Guj) to conclude that on the final determination of the amount of compensation, the right to such income in the nature of compensation would arise or accrue and till then there was no liability in praesenti in respect of the additional amount of compensation claimed by the owner
of the land.
Learned Counsel for the Revenue, however, relied upon K.C.P. Limited v. Commissioner
of Income
Tax
: [2000]245ITR421(SC) . We, however, find that the decision relied upon is quite inapposite. In K.C.P. Limited, the levy price of sugar was fixed at Rs. 120.30 per quintal and this was challenged by the assessed in the High Court of Andhra Pradesh. The assessed was then permitted by the High Court, by an interim order, to sell sugar at the rate prevailing prior to the notification fixing the levy price of sugar with the result that the assessed was able to sell the sugar at Rs. 131.01 per quintal plus excise duty until further orders.
(30 of 40) [ITA-10/2017]
The Andhra Pradesh High Court had Ltd. (ALLHC) [2008] 170 Taxman 148, it has been held as under:-
Briefly stated the facts giving rise to the present Reference are as follows: The assessee is a public limited company engaged in the manufacture of sugar and (31 of 40) [ITA-10/2017]
liquor. For this year the assessment was completed by the assessing officer on 20- 3-1987. The Commissioner, Meerut on a review of the assessment found that in the balance sheet of the assessee a sum of Rs. 37,43,172 was shown as a liability on account of collection of enhanced levy sugar price. This amount was shown under the head 'Current liabilities'. Out of this an amount of Rs. 30,21,873 was realised by the assessee during the year from the customers as excess price on the levy sugar. This amount was not brought to tax by the assessing officer in the original assessment
made
on 20-3-1987. Considering that this was a mistake on the part of the assessing officer, which resulted in causing prejudice to the interests of the revenue, the Commissioner gave a notice on 15-12-1988 to the assessee requiring him to explain as to why the assessment made by the assessing officer should not be modified by adding the above sum. There were also two other items which were mentioned in the notice but we are not concerned with those sums in this reference. The assessee replied that this sum was not taxable because this amount was realised by it as per an order passed by the Allahabad High Court by furnishing bank guarantee and the amount was not to be regarded as assessee's income in the sense that it came to the assessee not as a final amount. The Commissioner did not accept this contention for the reasons given by him in his order and directed to include this amount as income of the assessee.
The brief facts about the realisation of the sum are that the Allahabad High Court granted by its order dated 25-3-1983 and supplementary order dated 6-4-1983 an excess price of Rs. 21.40 per quintal to the assessee in respect of the levy sugar by enhancing the price fixed by the Government at Rs. 277.41 per quintal to Rs. 298.81 quintal with effect from 25-3- 1983. This was subjected to the furnishing of an advance bank guarantee in respect of differential price, which is to bear interest at the rate of 12 - per cent. This bank guarantee is to be encashed in the event
(32 of 40) [ITA-10/2017]
the assessee fails in the writ petition. It was on this basis that the assessee collected the enhanced price. The writ petition was subsequently transferred to the Hon'ble Supreme Court and it has still Income Tax and Anr. (DELHC) [2005] 274 ITR 413, it has been held as under :-
The learned counsel for the Revenue submitted that in view of the Supreme Court decision in Babulal Narottamdas & Ors. v. CTT : [1991]187ITR473(SC) , the interest which was earned by the assessed is required to be charged in the relevant year and not on the date when the Court made the order finally. In that case what was deferred was not the accrual of the right, but date of payment. As such, the right to receive the remuneration could not be said to have arisen on the date of the judgment of the High Court. The instant case is not one where merely the date of payment is deferred. Here, the entire right to receive the same was in question and jeopardy. The right accrued to the assessed when the award was affirmed by the High Court. Therefore, the aforesaid decision sought to be relied on by the learned counsel for the Revenue is not applicable to the present case.
(33 of 40) [ITA-10/2017]
In the instant case it is very clear that it was only in view of the order made by the Court that the amount was permitted to be withdrawn and that too on the furnishing of a bank guarantee of a nationalised bank and the appellant was required to refund the amount with interest to the respondent in case the respondent succeeded. Therefore, the determinative date would be the date on which the decision was rendered by the Court and it is for that relevant year that the Income Tax will have to be assessed as it can be said that the amount accrued on that date only.
In view of what has been discussed by us hereinabove, the answer is required to be given in favor of the assessed and against the Revenue. The appeals are allowed accordingly with no orders as to costs.
10 In Commissioner of Income Tax vs. Yatindra & Co. (ALLHC) [2005] 149 Taxman 281, it has been held as under:-
In the present case, there was a dispute between a contractor-assessee and his principal State Government in which a decree was passed against the Insurance Company f or a sum of Rs. 1,55,003 in favour of the assessee by the Civil Judge, Farrukhabad. Against the said order, appeal was filed before the High Court and in pursuance of the court order, decretal amount was deposited and was released in favour of the assessee on furnishing of a bank guarantee of the said amount in the year under consideration, The case of the assessee was that since the matter was sub-judice and had not yet become final, the amount received against the bank guarantee should not be treated as the taxable income during the year under consideration.
(34 of 40) [ITA-10/2017]
In the case of CIT v. Hindustan Housing & Land Development Trust Ltd.: [1986]161ITR524(SC) , the land was compulsorily acquired under the, land acquisition proceedings. The arbitrator fixed additional compensation. Against the said award, the Government preferred appeal. In pursuance of the Court's order, the amount was deposited and the court permitted the assessee to withdraw the amount only on furnishing of security. The Tribunal held that the amount did not accrue during the relevant previous year, therefore, not liable to tax. The Calcutta High Court has upheld the view of the Tribunal. The Apex Court has dismissed the appeal filed by the Commissioner of Income Tax. The Apex Court held that although the award was made by the arbitrator enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government and the dispute was regarded by the court as real and substantial because the respondent was not permitted to withdraw the amount deposited by the State Government without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal was allowed in its entirety, the right to payment of enhanced compensation would have fallen altogether. The extra amount of compensation was not income arising or accruing to the respondent during the previous relevant year.
Respectfully following the ratio laid down by the Apex Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) and the Bombay High Court in the case of Abdul Mannan Shah Mohammed (supra), we are of the view that the amount received by the assessee during the year under consideration in pursuance of the order of the High Court against the bank guarantee was not accrued to the assessee during the year under (35 of 40) [ITA-10/2017]
consideration inasmuch as no absolute right to receive the amount at that stage vested as the appeal was pending before the High Court and the entire decretal amount was subject-matter of dispute.
11 In Commissioner of Income Tax vs. Associated Soap Stone Distributing Co. Pvt. Ltd. (RAJHC) [1994] 210 ITR 661, it has been held as under :-
In the second appeal before the Tribunal, it was found that according to the award dated October 28, 1974, of the sole arbitrator, Mr. Kala, the assessee-company was to receive Rs. 92,415 by way of principal trade debt and Rs. 35,880 as interest up to the date of the award. The arbitrator further directed that the aforesaid amount awarded by him to the assessee against the aforesaid debtor shall carry future interest at the rate of ten per cent per annum from the date of the award up to the date of the realisation. The said award was filed in the court of District Judge, Jaipur, to make it a rule of the court. The Tribunal found that since the award was given ex parte and the matter is being contested, unless the said award is made a rule of the court and fructifies into a decree executable in the court of law, the assessee has no legal right to proceed for the recovery of the amount mentioned in the award and it is piece of paper and nothing more and, therefore, the addition of interest of Rs. 29,312 was deleted.
The assessee is carrying on the business and in the course of its business activities, certain dues were payable by Messrs. Podar Trading Co. (P.) Ltd. The matter was referred to the arbitrator. The arbitrator has mentioned in the award that a sum of Rs. 92,415.67 was due from Messrs. Podar Trading Company (P.) Ltd. against the supplies of soapstone made to them and this amount was admitted by them. There was an arbitration earlier in which Shri B. L. Ajmera, Chartered Accountant, was directed to reconcile the accounts which was duly complied with. There was an (36 of 40) [ITA-10/2017]
agreement between the assessee and Messrs. Podar Trading Company (P.) Ltd. that, in case of any dispute, the matter would be referred to arbitration. In the proceedings before the arbitrator. None appeared on behalf of Messrs. Podar Trading Company (P.) Ltd. and it is mentioned that initially there was a claim for a different figure but Messrs. Podar Trading Company (P.) Ltd. agreed in the earlier proceedings that a sum of Rs. 92,415.67 was payable and sheet F of the paper book before the arbitrator for that purpose was relied upon. It has not been stated as to what has happened in the proceedings before the District Judge, Jaipur, where the matter was challenged by Messrs. Podar Trading Company (P) Ltd. Under law, unless an award is made a rule of the court, it cannot be enforced. The amount which accrues or arises or is due can be said to be income under Section 5 of the Income Tax Act. The income cannot be said to have accrued under an award unless it is made a rule of the court and, therefore, the Income Tax Appellate Tribunal was justified in coming to the conclusion that the award in respect of interest which had accrued up to the date of award and further payment of interest under the said award cannot be considered to be income accrued unless it is made a rule of the court. A different position may arise in a case where the interest was payable otherwise and in that case if the accounts are maintained on mercantile basis, then the interest could be deemed to accrue but if the interest is under an award, then the income would be considered to have accrued or arisen only when it is made a rule of the court. This matter pertains to the assessment year 1975-76 and by this time it must have become a rule of the court and a final decree must have been passed. It will be for the Income Tax Officer to get the information from the assessee and assess in the year in which it has been made a rule of the court.
(37 of 40) [ITA-10/2017]
12
In CIT
v.
Sharda
Sugar
Industries
Ltd., [1999]239ITR393(Bom), it has been held as under:- An identical controversy came up before the Karnataka High Court in CIT v. Mysore Sugar Co. Ltd. [1990] 183 ITR 113. In that case also the dispute was whether the amount collected by the assessee pursuant to the interim orders of the High Court over and above the price of sugar fixed by the Government could be treated as the income of the assessee. The Karnataka High Court held that it did not form part of the turnover of the assessee and was not liable to tax. It was observed (page 118) : ". . . in the present case, what has happened is that the assessee was permitted to collect the amount in question only pursuant to the interim order made by the court which was subject to several conditions to make the right absolute and, therefore, the collection made by the assessee at an enhanced rate is an inchoate one as this extra amount did not accrue to the assessee until the finalisation of the dispute pending before one court or the other. It is only on the final determination of the amount that the right to such income in the nature of levy price would arise or accrue and till then there is no liability in praesenti in respect of the additional amount of price claimed by the assessee. Therefore, these cases fall within the scope of the first class of cases noticed by the Supreme Court in Hindustan Housing and Land Development Trust Ltd.'s case [1986] 161 ITR 524, where it was held that where the right to receive payment is in dispute and it is not merely a question of quantifying the amount to be received, no income would arise or accrue till the levy price is finally fixed."
The law is thus well-settled that where the right to receive payment is in dispute, no income will arise or accrue. In the present case, admittedly, the amounts in question were collected and retained by the assessee as deposits pending the final decision of the writ petition by the (38 of 40) [ITA-10/2017]
Allahabad High Court pursuant to the interim order of that court and that too subject to furnishing a bank guarantee in respect thereof. There was a serious dispute about the right of the assessee to receive the amount collected by the assessee. In other words, the right to receive the amount was inchoate or contingent. The extra amount did not accrue to the assessee until the finalisation of the dispute pending in the court in favour of the assessee. The assessee was accountable for the excess collection and obliged to refund the same if so directed by the court. Such amounts collected by the assessee are not assessable as the income of the assessee. In that view of the matter, in our opinion, the Tribunal was right in coming to the conclusion that the amounts in question were not assessable in the hands of the assessee in the assessment years under consideration.
13 In Cit vs. Jeevan & Sons [2001] 116 Taxman 565 (Rajasthan), it has been held as under:- The decision of the Tribunal was based on the decison given by the Supreme Court in Hindustan Housing & Land Development Trust Ltd.'s case (supra). There was no ground whatsoever to distinguish that case from this case. It is well-established that if the decison is in accordance with the law declared by the Supreme Court, it cannot be said that any question of law referable to the High Court under Section 256 (2) of the Act arises.
He contended in view of the decision of Ghanshyam (HUF) (supra) relevant observations we reproduced above, the issue is required to be answered in favour of the assessee.
(39 of 40) [ITA-10/2017]
1 amount of Rs.91,59,305/- credited on escalation head has rightly been shown in the balance sheet as liability.
In that view of the matter, we are of the opinion that CIT(A) & tribunal have not committed any error in deleting the addition. In that view of the matter, though judgment in M/s. Mittal Brothers & Co. (supra) which was relied upon is required to be distinguished in the present case inasmuch as in the said case, the amount was received and entered in books of accounts.
Thus, the issue in the present case is squarely covered in favour of the assessee in view of observation made in para no.28 of the case of Ghanshyam (supra).
In that view of the matter, the issue is answered in favour of the assessee and against the department.
(40 of 40) [ITA-10/2017]
The appeal (210/2017) filed by the department stands dismissed. Appeal No.10/2017
In view of the decision of tax appeal no.210/2017, we are not deciding the issue in appeal no.10/2017 and it will be open for the assessee that in case of department prefers appeal against the aforesaid judgment before the Supreme Court to agitate this issue by cross objection before the Supreme Court.
The appeal stands accordingly disposed of. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Brijesh 62-63.
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