A.R. Somnath Iyer.
1. The question referred to us under section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal, at the instance of the Commissioner of Income-tax, is :
'Whether, on the facts and in the circumstance of the case, the Appellate Tribunal was right in law in holding that the entire interest amount of Rs. 87,265 was not assessable in the assessment year 1962-63 and that only the proportionate interest referable to the assessment year 1962-63 was assessable in that year ?'
2. This is how the question arises :
3. By a notification made on January 13, 1948, under section 4 of the Land Acquisition Act, a land owned by the assesses measuring 20,000 square yards was proposed to be acquired, and on February 19, 1949, possession was taken. The Land Acquisition Officer of the Corporation of the City of Bangalore made an award on June 2, 1949, by which he determined the compensation payable to the assesses to be a sum calculated at Rs. 2 a square yard. He also gave him the usual statutory allowance. This sum of money aggregating to Rs. 46,000 was paid to the assesses only on December 31, 1949. But there was a reference to the District Judge under section 18 of the Land Acquisition Act, and, in that reference, the District Judge enhanced the compensation to a sum calculated at Rs. 5 a square yard. From the decree made by the District Judge in that way, both the assesses and the Land Acquisition officer appealed to the former High Court of Mysore, which, by a decree made on March 30, 1956, enhanced the compensation to a sum calculated at Rs. 7 a square yard. There was again an appeal to the Supreme Court by both the parties, and those appeals were dismissed by the Supreme Court on March 7, 1961.
4. A sum of Rs. 2,02,265 became payable to the assesses under the decree eventually made by the Supreme Court. This sum of money, which consisted of a sum of Rs. 1,15,000 which represented the compensation, and a sum of Rs. 87,265, which represented the interest, payable from the date on the which delivery of possession was taken on February 19, 1949, till October 12, 1961, was paid to the claimant on October 12, 1961.
5. In the return, which she produced in the respect of the assessment year 1962-63, under the provisions of the Indian Income-tax Act, 1961, the assesses disclosed the receipt of this sum of Rs. 2,02,265, but claimed that the whole of that amount was of exempt from tax on the ground that it was a capital accretion. The Income-tax Officer upheld the contention that no tax was payable in respect of the compensation amounting to Rs. 1,15,000 but negatived the plea that the interest which was received by the assesses was a capital receipt. So, the sum of Rs. 87,265, which represented the interest paid to the assesses by the Land Acquisition Officer, was taxed as a revenue receipt. The appeal preferred by the assesses to the Appellate Assistant Commissioner was dismissed, but, in the further appeal, the Income-tax Appellate Tribunal took the view that the interest paid to the assesses was taxable income, but that only so much of it which was payable during the relevant previous year could be taxed in the assessment year 1962-63. It said this :
'In each successive year after February 19, 1949, the assesses acquired the right to receive the interest for that year. Although the amount to interest that was payable to the assesses was only determined in 1961, after the judgment of the Supreme Court, still, the right to receive the interest had accrued to the assesses even much earlier. The interest that was payable to the assesses in each successive year was liable to be assessed in that year itself and the assessment of that interest cannot be postponed till the date on which the interest became ascertained or when the interest was actually paid to the assesses.... The assesses all long possessed the right to receive the interest payment from 1949 itself and, therefore, the proportionate interest referable to each successive year during the period from February 19, 1949, to October 12, 1961, was assessable in that respective year. It follows that it is only the proportionate interest that is referable to the assessment year 1962-63 that can be assessed in the hands of the assesses in this year the entire interest which was actually paid to the assesses in this year cannot be assessed in his hands in this year alone.'
6. On behalf of the department, Mr. Rajasekhara Murthy maintained that the Appellate Tribunal missed the true import of the decision of the Supreme Court in Keshav Mills Ltd. v. Commissioner of Income-tax, and E.D. Sassoon & Company Ltd. v. Commissioner of Income-tax, on which it depended as could be seen from the more recent enunciation in Commissioner of Income-tax v. A. Gajapathy Naidu.
7. The pendency of the appeals before the Supreme Court, it was said, introduced an element of uncertainty as to the compensation really climbable which denuded the High Court decries of the attribute of finality, and the argument was constructed that the right to compensation and the interest thereon did not accrue until there was their quantification by the Land Acquisition Officer on the basis of the decisions in those appeals.
8. The proposition that the accrual of that right stood so postponed cannot be sound.
9. When the Land Acquisition Officer made his award and possession was taken, he became liable under section 34 of the Land Acquisition Act to pay interest on the amount awarded if it was not paid when possession was taken. Similarly, when the compensation was enhanced by the district judge and again by the High Court and there were directions for payment of interest under section 28, such interest became payable when those directions were made.
10. It was suggested to us by Mr. Swaminathan for the assesses that the right to the whole of the compensation and interest which eventually becomes payable is born when an acquisition starts, and in any event, when possession is taken, and dependence was placed on the statement of the law by the Supreme Court in Commissioner of Income-tax v. K.R.M.T.T. Thiagaraja Chetty & Company and Kesoram Industries and Cotton Mills Ltd. v. Commission of Wealth-tax that the accrual of income which has became due does not wait until its quantification.
12. But the question in this reference is, whether the right to the whole of the interest accrued only when it was paid. If it did not, and if the interest in respect of the period which commenced on April 1, 1961, and expired on October 12, 1961, was all that accrued during the relevant preceding year and the interest in respect of the antecedent period had accrued earlier, whatever may be points of time when there was such accrual, the Appellate Tribunal's view would be irreproachable.
13. Now, when possession was taken by the Land Acquisition Officer, he became liable to pay interest until the amount awarded by him was paid, and the assesses acquired the right to recover it from him. The direction of the District Judge for the payment of interest on the enhanced compensation, which his decree made on February 28, 1951, incorporated, produced the right to recover such interest at least on the date of the date of that decree. Then again, when compensation was further enhanced by the former High Court of Mysore which made a similar direction for the payment of interest on such enhanced compensation, all that interest which that amount so earned from February 19, 1949, became immediately due and payable under an executable decree.
14. It is difficult to understand how the pendency of the appeal before the Supreme Court could arrest the accrual of that income. It did not. It is admitted that during the pendency of the appeals before the Supreme Court, there was no stay of execution. Even if there was, its impact on accrual is debatable.
15. So, the premise that the right to no part of the interest was born until the Land Acquisition Officer made his arithmetic after the Supreme Court disposed of the appeals, cannot have the support of reason.
16. There was thus a complete acquisition of the right to recover the accumulate interest on the amount awarded by the Land Acquisition Officer when possession was taken, and on the enhancement, when the appropriate decree made such enhancement and to subsequent interest so long as it ran but was not paid. Such interest became income which accrued in the year in which it became so recoverable within the meaning of section 4(1)(b)(i) of the Income-tax Act, 1922, so long as that Act was in force, and, of section 5(1)(b) of the Income-tax Act, 1961, when that Act commenced to operate. The attributed of the whole of that interest to the year of receipt is manifestly impossible.
17. The omission by the assesses to include the interest which had so accrued to him in the return of the earlier years cannot yield the deduction that he chose to treat the interest as the income of the year in which he received it. Indeed, no such theory was evolved at any stage. On the contrary, it should be remembered that the contention of the assesses has all along been that no part of the interest was a revenue receipt and it is not unintelligible that it is due to that reason that there was an omission to disclose the interest which had accrued due when he produced the returns for the earlier years.
18. The principal on which the finding of the Tribunal rested, was that which emerges from the decision of the Supreme Court in E.D. Sassoon Company Ltd. v. Commission of Income-tax, in which it was observed :
'The computation of the profits whenever it may take place cannot possibly be allowed to suspend their accrual....'
What has however got to be determined is whether the income, profits or gains accrued to the assesses and in order that the same may accrued to him it is necessary that he must have acquired a right to receive the same or that a right to the income, profits or gains has become vested in him though its valuation may be postponed or though its material station may depend on the contingency that the making up of the accounts would show income, profits or gains.'
19. This enunciation continues to be the law and stands in no way impaired by the subsequent decision in Commissioner of Income-tax v. A. Gajapathy Naidu, on which Mr. Rajasekhara Murthy depends.
20. If this was the principle by the application of which the Tribunal deduced its conclusion, very little could be said in criticism of the attribution made by it.
21. But Mr. Rajasekhara Murthy asks us to say that even if the right to interest had accrued to the assesses periodically during the many years which preceded the assessment year 1962-63, so long as the assesses did not maintain his accounts on the mercantile basis, the interest received by him during the previous year relating to the assessment year 1962-63, could be taxed during that assessment year. In support of this argument, he depended upon the observations in Gajapathy Naidu's case, in which there was an explanation of the familiar rule that income is taxable when it accrues or is earned, if the assesses's accounts are maintained on the mercantile basis, and when it is received, if the method of accounting is the cash system. But this elucidation does not take the department far enough. The mercantile system which, when regularly employed, credits income immediately after it becomes due and recoverable, dispenses, in a proper case, with further proof, that it then accrued, while the cash system which displays the choice of the assesses to treat the income as having arisen when it was received, regulates computation accordingly. And, in the case before us, in which the Appellate Tribunal did not find that the method of accounting employed was the one or the other, the income became taxable when it became legally due and recoverable, for, it is then that it accrued.
22. That being so, we must answer the question referred to us in favour of the assesses, and out answer is that the Appellate Tribunal was right in holding that the entire interest amount of Rs. 87,265 was not assessable in the assessment year 1962-63 and that only the proportionate interest referable to the assessment year 1962-63 was assessable in that year.
23. The assesses will get his costs in this reference. Advocate's fee Rs. 250.