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Commissioner of Income-tax Vs. Motilal Padampat Sugar Mills Co. (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 723 of 1970
Judge
Reported in[1979]118ITR825(All)
ActsIncome Tax Act, 1961 - Sections 34, 23(3), 143(3) and 297(2)
AppellantCommissioner of Income-tax
RespondentMotilal Padampat Sugar Mills Co. (P.) Ltd.
Appellant AdvocateDeoki Nandan, Adv.
Respondent AdvocateAshok Gupta, Adv.
Excerpt:
.....standing counsel contended that the interest on the amount of damages from the date of suit till the date of the decree as well as the interest on that amount from the date of decree till the date of realisation would be a revenue receipt and not, capital receipt, and hence, be assessable to..........by the amount of rs. 1,11,466 '2. the relevant facts, briefly stated, are these :the assessment year in question is 1961-62. the assessee is a private limited company, which owns and runs amongst others a sugar factory at majhalia, district champaran (bihar). the assessee purchased its mill engine from a german firm in the year 1932, but it was actually delivered late. in the year 1935, the assessee filed a suit against the german firm for a sum of rs. 2,05,000 on the ground that the machinery was delivered late and in a defective condition. the claim of the assessee consisted of the following items :rs.(i) cost of replacing, altering and improvingboilers, pumping set, steam receivers and pressure gauges, etc.. . .20,443.65(ii) damages for the number of days lost due todelay in the.....
Judgment:

D.M. Chandrasekhar, J.

1. The Income-tax Appellate Tribunal, Allahabad Bench (hereinafter referred to as the ' Tribunal '), has referred the following two questions of law to this court under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as ' the Act ').

' (1) Whether, on the facts and in the circumstances of the case, the assessment as made by the Income-tax Officer is valid in law ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the whole of the sum of Rs. 2,20,192.51 being the amount of compensation received and entered in the books of the previous year had, according to the mercantile system of accountancy, become receivable prior to the previous year so that it was not necessary for the Tribunal to consider whether or not it represented partly or wholly revenue receipt, and whether the capital cost of the plant should have been reduced by the amount of Rs. 1,11,466 '

2. The relevant facts, briefly stated, are these :

The assessment year in question is 1961-62. The assessee is a private limited company, which owns and runs amongst others a sugar factory at Majhalia, District Champaran (Bihar). The assessee purchased its mill engine from a German firm in the year 1932, but it was actually delivered late. In the year 1935, the assessee filed a suit against the German firm for a sum of Rs. 2,05,000 on the ground that the machinery was delivered late and in a defective condition. The claim of the assessee consisted of the following items :

Rs.

(i) Cost of replacing, altering and improvingboilers, pumping set, steam receivers and pressure gauges, etc.

. . .

20,443.65

(ii) Damages for the number of days lost due todelay in the erection and defects and troubles in the boilers, pumping set,etc.

. . .

1,11,465.81

(iii) Loss of profit from 3-1-1933 to 1-6-1933,due to unsatisfactory working of the plant

. . .

27,498.19

(iv) Interest on the above sums up to 8-11-1935, being the date of filing the suit

. . .

45,592.35

Total

. . .

2,05,000.00

3. The suit was decreed in favour of the assessee in December, 1953, for a sum of Rs. 2,05,000 together with costs and interest from the date of the suit till the date of realisation. After protracted negotiations with the Government and the Custodian of Evacuee Property, the assessee was ultimately able to realise Rs. 2,20,192 during the previous year relevant to the assessment year 1961-62, The amount realised consisted of the following items :

Rs.

(i) Suit claim

. . .

2,05,000.00

(ii) Costs awarded by the High Court

. . .

529.00

(iii) Costs awarded by the trial court

. . .

3,717.28

(iv) Interest from the date of suit till the dateof decree

. . .

15,667.00

Total

. . .

2,24,913.28

Less commission

. . .

4,780.77

Net amount

. . .

2,20,192.51

4. The assessee filed its return for the assessment year 1961-62 on September 31, 1961. Subsequently, it filed a revised return on March 10, 1964, and a further revised return on March 24, 1964.

5. The assessee claimed the whole of the aforesaid amount of Rs. 2,20,192 as not being assessable to tax on the ground that it was a capital receipt and not a revenue receipt. In the order of assessment the provision of law under which the assessment was made was mentioned as Section 143(3) of the Act. The ITO treated only a sum of Rs. 20,433 (the cost of replacing, altering and improving boilers, pumping sets, steam receivers and pressure gauges, etc.) as a capital receipt, and the balance as a revenue receipt and, hence, the income of the assessee for the assessment year 1961-62,

6. The assessee appealed from the order of the ITO. Therein the order of assessment was impugned on the ground that it could be made only under Section 23(3) of the Indian I.T. Act, 1922 (hereinafter referred to as the 'old Act'), and not under Section 143(3) of the present Act. But this contention was negatived by the AAC, who held that the assessment under the present Act was valid as the assessee had filed its revised return on March 24, 1964. As regards the damages received by the assessee, he held that the second item of its claim against the German firm, i.e., Rs. 1,11,466, could not be said to be a revenue receipt.

7. Against the decision of the AAC, both the assessee and the revenue went up in appeal. The assessee's appeal was ITA No. 17355 of 1966-67. In the appeal by the revenue, the correctness of the finding of the AAC that the second item of the assessee's claim for damages was a capital receipt was challenged.

8. The Tribunal disposed of the two appeals separately. In the assessee's appeal, i.e., ITA No. 17355 of 1966-67, the Tribunal also rejected the assessee's contention that the assessment was invalid on the ground that it was made under Section 143(3) of the present Act and not under Section 23(3) of the old Act. Before the Tribunal, the assessee reiterated its contention that theentire sum of Rs. 2,20,192.51 received as damages was a capital receipt and, hence, no part of it should have been included in its income. It (the assessee) also urged that as it was following regularly the mercantile system of accounting, the entire amount of damages accrued and became receivable prior to the previous year for the assessment year 1961-62, and, hence, no part of the amount amid be brought to tax in the assessment for the year 1961-62,

9. While dealing with the above contentions, the Tribunal said that the question relating to assessability of Rs. 1,11,466 (the second item of the assessee's claim against the German firm) would be considered in the appeal by the revenue.

10. As regards items (i) and (iii) to (vii) of the assessee's claim against the German firm, the Tribunal held that as the assessee was following regularly the mercantile system of accounting and the compensation was receivable by the assessee on the date of decree, namely, December 15, 1953, it could not be said that the amounts received towards these items of damages were earned during the previous year for the assessment year 1961-62. The Tribunal did not consider it necessary to go into the question whether the receipt of such amounts was of capital nature or of revenue nature. As regards interest up to the date of decree as well as up to the date of payment in December, 1958, the Tribunal held that though it was a revenue receipt, it could not be taxed in the assessment year 1961-62, in spite of being received in the previous year thereto. As regards the interest from the date of the decree up to December, 1958, the Tribunal held that even such interest had accrued prior to the previous year and hence could not be taxed in the assessment year 1961-62.

11. This reference was heard in the first instance by a Bench consisting of Asthana J. (as he then was) and Gulati J. Their Lorships observed :

' So, it is necessary in the instant case to find out if the assessee had made any such entry prior to the date when it actually realised the amount (damages). Now it is also possible that an assessee, who follows the mercantile system of accounting, may switch over to cash system in respect of a class of transaction or a particular transaction. It is also possible that an assessee may not record a particular transaction as a business transaction and may follow no system of accounting in respect thereof. It is necessary, therefore, that the Tribunal should record a finding whether the assessee treated the transaction giving rise to the damages as a part of its business and whether it followed the mercantile system of accounting in respect thereof. '

12. Their Lordships directed the Tribunal to submit a supplementary statement of the case setting out the facts and findings indicated in the above-quoted passage of their Lordships' order.

13. Accordingly, the Tribunal has submitted a supplementary statement of the case in which it has stated, inter alia, as follows ;

' Purchase of a machine for its businees is obviously a business transaction and, therefore, it was assumed without any argument that the damages claimed were part and parcel of the assessee's sugar business in respect of which the assessee, as already stated, was maintaining accounts on mercantile basis. From the facts placed before the departmental authorities and before the Tribunal at the time of hearing of the appeal it can be reasonably inferred that no entries were made by the assessee in its accounts in respect of the damages claimed in any of the years prior to the previous year relevant for the assessment year under reference, when the sum of Rs. 2,20,192 was received, i.e., in the previous year ending July 31, 1960, relevant for the assessment year 1961-62 (under reference)... The short question before the Tribunal was whether in the case of an assessee following mercantile system of accounting an amount accrued in the earlier years, but not shown in those years, can be taxed as the income of the year in which it was received on the ground that it was not so shown and assessed in the earlier years. For reasons given in its appellate order, which need not be repeated here, it was held by the Tribunal that the amount could not be taxed as the income of the year in which it was received.

14. The first question referred to us does not present much difficulty as pointed out by the AAC and the Tribunal; the assessee himself submitted two revised returns one on March 10, 1964, and another on March 24, 1964, The ITO considered them.

15. Clause (b) of Sub-section (2) of Section 297 of the Act provides that notwithstanding the repeal of the Act (the Indian I.T. Act, 1922), where a return of income is filed after the commencement of the Act (of 1961), otherwise than in pursuance of a notice under Section 34 of the old Act by any person for the assessment year ending on March 31, 1962, or in an earlier year, the assessment of that person for that year shall be made in accordance with the procedure specified in the Act (of 1961).

16. Since the assessee filed after April 1, 1962 (the date of commencement of the present Act) two revised returns which were not in pursuance of any notice issued to it under Section 34 of the old Act, the assessment for the year 1961-62 could be made under the provisions of the present Act, as rightly held by the AAC and the Tribunal.

17. This was also the view taken by Hari Swarup J. in his separate judgment in Dhampur Sugar Mills Ltd. v. CIT : [1973]90ITR236(All) . HisLordship said thus at page 241 : ..

' The return contemplated in these two clauses is the return on the basis of which assessment is to be completed. A return which has beensubstituted by a revised return is, for all practical purposes, the return of income as the assessment has to be completed on the basis of the revised return. After the revised return is filed the assessee has to prove the correctness and completeness of the revised return. Similarly, the assessing authority has to see that the revised return discloses the correct income. Although the proceedings are taken by applying the old Act, when the return is filed prior to April 1, 1962, by virtue of Clause (a) of Sub-section (2) of Section 297 of the 1961 Act, the proceedings get a new form when the assessee voluntarily files a revised return after April 1, 1962, then assessment must be completed by virtue of Clause (b) of Sub-section (2) of Section 297 of the 1961 Act, in accordance with the procedure specified in the Act of 1961.'

18. Alternatively, even if the assessment had to be made under Section 23(3) of the old Act, the assessment purported to have been made under Section 143(3) of the present Act, cannot be regarded as invalid as it (the assessment) can be attributed to the jurisdiction vested in the ITO under the old Act. This was also the view taken by Pathak J. in Laxmi Industries & Cold Storage Co. Pvt. Ltd. v. ITO : [1971]79ITR248(All) and in Dhampur Sugar Mills' case : [1973]90ITR236(All) . As observed by his Lordship, the conditions and limitations to which the jurisdiction under Section 23(3) of the old Act is subject, do not differ in any material respect from those governing the corresponding jurisdiction under the present Act.

19. Regarding the second question referred, to us, Sri Ashok Gupta, learned counsel for the assessee, raised a preliminary objection that the question as to taxability of Rs. 1,11,466 (the second item of the assessee's claim against the German firm) cannot be considered in this reference since that question was expressly reserved by the Tribunal to be considered in the separate appeal filed by the I.T. department and, hence, did not arise out of the Tribunal's order out of which this reference has in tern arisen. Sri Gupta submitted that though the second question referred by the Tribunal relates to the whole of the sum of Rs. 2,20,192 and includes the sum of Rs. 1,11,466 (the second item of the claim for damages) also, we should exclude this item from the scope of this reference.

20. On the other hand, the learned standing counsel for the I.T. department submitted that since this court has called for a supplementary statement of the case from the Tribunal in respect of the entire amount of damages received by the assessee from the German firm, it was too late in the day for Shri Gupta, to contend that the said second item cannot be the subject-matter of this reference.

21. It was also contended by the learned standing counsel that since the question as to assessability of Rs. 1,11,466 (the second item of the assessee'sclaim for damages) had been expressly raised before the Tribunal, but was not dealt with by the Tribunal, that question should be regarded as arising out of the order of the Tribunal in the light of the enunciation of law on the point by the Supreme Court in CIT v. Scindia Steam Navigation Co. Ltd. : [1961]42ITR589(SC) .

22. In Scindia Steam Navigation Co.'s case : [1961]42ITR589(SC) , the Supreme Court, while elucidating as to when a question of law can be said to arise out of an order of a Tribunal, said, inter alia, that when a question of law is raised before a Tribunal, but it (the Tribunal) fails to deal with it, it must be deemed to have been dealt with by it, and such question, therefore, is one arising out of its order.

23. Since the AAC had held that the sum of Rs. 1,11,466 was not assessable to tax, the question of assessability of that sum could not arise in the appeal filed by the assessee and that question would arise only in the appeal filed by the I.T. department against that finding of the AAC. The Tribunal overlooked this aspect while referring the second question to this court. When this court directed the Tribunal to submit a supplementary statement of the case, whether the question of assessability of Rs. 1,11,466 arose for consideration by the Tribunal in the assessee's appeal, ITA No. 17355 of 1966-67, and arose, in turn, out of the order of the Tribunal in that appeal, was neither considered nor decided by this court.

24. When the question of assessability of Rs. 1,11,466 did not arise for decision in the assessee's appeal before the Tribunal and the Tribunal also reserved that question to be considered in the appeal filed by the I.T. department, we have no hesitation in rejecting the contention of the learned standing counsel that that question was raised before the Tribunal in ITA No. 17355 of 1966-67, that the Tribunal failed to deal with it, that that question must be deemed to have been dealt with by the Tribunal and that, therefore, that question is one arising out of its (the Tribunal's) order.

The preliminary objection of Sri Gupta is, in our opinion, well founded. Hence, we restrict the scope of the second question referred to us by excluding the question of assessability of Rs. 1,11,466.

25. Even as regards Rs. 20,443 (the first item of the assessee's claim for damages against the German firm), the ITO himself held that the amount was not assessable to tax being a receipt of a capital nature. When the ITO himself has treated this item to be so, the question of assessability of this amount did not arise for consideration, before the AAC in the appeal filed by the assessee nor did it arise for consideration before the Tribunal in the further appeal filed by the assessee, ITA No. 17355 of 1966-67. Hence, the question of assessability of Rs. 20,443 also did not arise from the order of the Tribunal in ITA No. 17355 of 1966-67 and could notbe referred to us by the Tribunal. We exclude that item also from the scope of the second question referred to us.

26. Regarding the third item, i.e., Rs. 27,498, awarded by the decree towards loss of profit from January 3, 1933, to June 1, 1933, the learned standing counsel contended that a compensation for loss of profit being in lieu of profit, would be a receipt of a revenue and not of capital nature. Likewise the learned standing counsel contended that the interest on the amount of damages from the date of suit till the date of the decree as well as the interest on that amount from the date of decree till the date of realisation would be a revenue receipt and not, capital receipt, and hence, be assessable to tax. The learned standing counsel also maintained that if the expenses of litigation should be regarded as business expenditure, the costs awarded by the court in favour of the assessee should be regarded as revenue receipt and not capital receipt.

27. In regard to the compensation for loss of profits, interest up to the date of suit and costs awarded by the court, the contention of Sri Gupta was that the right to receive them accrued to the assessee on the date the decree was passed in its (the assessee's) favour, i.e., in December, 1953, and that since the assessee was following the mercantile system of accounting, those items could be taxed only in the year relevant to the previous year in which the decree was passed and not in the year of realisation. Even in regard to interest subsequent to the date of the decree, Shri Gupta contended that only the interest that accrued in the previous year relevant to the assessment year 1961-62 could be taxed in that year and interest in the earlier years could not be taxed in the assessment year 1961-62, though the entire amount of interest was received in the previous year for the assessment year 1961-62.

28. Shri Gupta is right in contending that the right to receive compensation for loss of profits, and interest on the assessee's claim against the German firm, up to the date of the decree, accrued on the date of the decree and that the right to receive further interest from the date of the decree accrued year by year from the date of the decree till realisation of the decretal amount.

29. In CIT v. A. Gajapathi Naidu : [1964]53ITR114(SC) , the Supreme Court summed up the legal position as to the year in which a receipt should be taxed, thus (p. 119) :

' When an Income-tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions,namely :

(i) What is the system of accountancy adopted by the assessee ; and

(ii) If it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued ?

If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year.'

30. In CIT v. Chunilal V. Mehta and Sons (P) Lid. : [1971]82ITR54(SC) , the assessee claimed compensation for termination of its managing agency. It filed a suit claiming Rs. 28 lakhs as compensation. The suit was decreed for Rs. 2,23,000. The assessee received the amount in December, 1955, and credited it in the profit and loss account for the year 1955. The question arose whether the amount accrued to the assessee on April 23, 1951, when its managing agency was terminated or whether it was assessable in the year 1956-57, since it received this amount in December, 1955. The Supreme Court held that the compensation became due to the assessee in April, 1951, though it was actually received by it in December, 1955, and that, since the assessee adopted mercantile system of accounting, the year in which, the amount was received was immaterial. The Supreme Court also held that the fact that the assessee included the receipt of this sum in its profit and loss account in the year 1955 was wholly an immaterial circumstance. The Supreme Court observed that the method of maintaining accounts is one thing and the actual entries in the accounts maintained is a different thing and that what is relevant is the method of accounting and not the actual entries.

31. In the light of the aforesaid pronouncements of the Supreme Court, it is clear that, for the purpose of assessment, the year or years in which the several items decreed in favour of the assessee became due, are alone relevant and not the year in which they were actually received. Since the assessee had been following the mercantile system of accounting, whether or not it (the assessee) had actually entered any of these items in its books of account in the year in which they accrued, is wholly immaterial since what determines the liability to tax is the accrual of income and not the entry of such income in the books of account of the assessee.

32. The learned standing counsel contended that the assessee who was following the mercantile system of accounting in respect of its business, might or might not have followed the same system in respect of its purchase of machinery and the receipt of compensation or damages from the German firm and, hence, it could not be said that the several items of compensation were taxable on the basis of the year of accrual and not on the basis of the year of receipt.

33. The above contention of the learned standing counsel overlooks the following statement in the Tribunal's supplementary statement of the case :

' Purchase of machine for its business is obviously a business transaction and, therefore, it was assumed without any argument that the damages claimed were part and parcel of the assessee's sugar business in respect of which the assessee, as already stated, was maintaining accounts on mercantile basis.'

34. In view of the above statement of facts by the Tribunal, it is not open to the learned standing counsel to contend that the mercantile system of accounting was not adopted by the assessee in respect of the several items of the compensation realised by it (the assessee).

35. As the Tribunal had expressly reserved the question of assessability of Rs. 1,11,466 to be considered in the other appeal (preferred by the revenue) and that question did not arise for consideration in ITA No. 17355 of 1966-67 (the appeal out of which this reference has arisen) it follows that the question, whether the capital cost of the plant should be reduced by the amount of Rs. 1,11,466, did not also arise for consideration in ITA No. 17355 of 1966-67, nor was it necessary for the Tribunal to consider that question, though not for the reason given by the Tribunal as to why it was not necessary.

36. As a result of the foregoing discussions, our answers to the questions referred to us are as follows :

(i) The assessment in question is valid in law.

(ii) On the facts and circumstances of the case, the finding of the Tribunal that the compensation received by the assessee and entered in its books of account in the previous year (relevant to the assessment year in question) had, according to the mercantile system of accounting, become receivable prior to the said previous year, so that it was not necessary to consider whether or not it represented partly or wholly revenue receipt is justified, The Tribunal was justified in holding that it was unnecessary to consider in the appeal (ITA No. 17355 of 1966-67), whether the capital cost of the plant should have been reduced by the amount of Rs. 1,11,466, though not for the reason given by it (the Tribunal).

37. As our answers are partly in favour of the assessee and partly in favour of the revenue, we direct the parties to bear their own costs in this reference.

38. The supplementary statement of the case submitted by the Tribunal in this case (I.T.R. No. 723 of 1970) has been wrongly numbered as I.T.R. No. 475 of 1973, though this is not an independent reference.

39. Hence, it is not necessary to pass any separate order in I.T.R. No. 475 of 1973.


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