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Commissioner of Agrl. Income-tax Vs. Kerala Estate - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 84 of 1971 (Agrl.)
Judge
Reported in[1974]96ITR210(Ker)
ActsKerala Agricultural Income Tax Act, 1950
AppellantCommissioner of Agrl. Income-tax
RespondentKerala Estate
Appellant AdvocateGovernment Pleader
Respondent Advocate T.L. Viswanatha Iyer and; E.R. Venkiteswaran, Advs.
Cases ReferredSeverne v. Dadswell
Excerpt:
.....very clearly in the judgment of rowlatt..........settlement was made whereby it accrued. we are not called upon to decide the question in which year the income was to be assessed and if we had been called upon to decide that question, we would naturally have followed the decision of the supreme court that it must be assessed in the year in which the settlement was made. this question does not arise here.12. apart from the principle stated in the decision in severne v. dadswell, when a year's account has been finally settled with reference ;to the liabilities, there can be no question of reopening that year's assessment made on that factual and real basis. the only question then is whether what has been given up by a creditor in favour of an assessee or returned to him can be said to be income of the assessee. we find it difficult.....
Judgment:

Govindan Nair, J.

1. A somewhat difficult question has been referred to us by the Kerala Agricultural Income-tax Appellate Tribunal, Trivan-drum. The question is this :

' Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 33,747.09 is not agricultural income for the assessment year 1964-65 '

2. The assessees, seven in number, have the status of tenants-in-common. They owned an estate from which they derived agricultural income liable to be assessed in the year 1963-64. The assessees then claimed that a sum of Rs. 33,747.09 was payable towards interest on a loan of Rs. 4 lakhs taken by them from M/s. Associated Planters Ltd., Calicut. In computing the agricultural income liable to be assessed to tax in the year 1963-64, this sum was allowed to be deducted. In the accounting period relating to the assessment year 1964-65, M/s. Associated Planters Ltd. waived the claim for interest and, thefore, the amount was credited to the revenue accounts of the assessees. The assessees were admittedly following the mercantile system of accounting. The question that arose for decision before the Tribunal was whether this sum of Rs. 33,747'09 credited towards interest in the relevant previous year could be assessed in the year 1964-65. The Tribunal, by a majority, held that it was not agricultural income.

3. The question to be decided is whether the view of the Tribunal is correct; The departmental member who wrote the dissenting order relied on the decision of the Bombay High Court in In re Union Bank of Bijapur and Sholapur Ltd., [1942] JO I.T.R. 21 (Bom.) in support of his view that the amount credited to the account, viz., Rs: 33,747.09, is agricultural income: Before us, counsel on behalf of the revenue and counsel for the assessees have referred to a large number of decisions, most of which had been noticed and dealt with in the judgment of the Mysore High Court in Commissioner of Income-tax v. Lakshmamma, [1964] 52 I.T.R. 789, 797 (Mys.); A reference to these decisions would show that there is apparent conflict between the set of decisions in In re Union Bank, Gajapathi Naidu v. Commissioner of Income-tax, [1960] 40 I.T.R. 282 (Mad.), Sheikh Rahmat Ali v; Commissioner of Income-tax, [1960] 39 I.T.R. 506 (Pat.) on the one hand, and the decisions in Mohsin Rehman Penkar v. Commissioner of Income-tax, [1948] 16 I.T.R. 183 (Bom.), Agarchand Chunnilal v. Commissioner of Income-tax, [1948] 16 I.T.R. 430 (Nag.) and Orient Corporation, Bombay v. Commissioner of Income-tax, [1950] 18 LT.R. 28 (Bom.) on the other. This apparent conflict was explained by the decision in Commissioner of Income-tax v. Lakshmamma on the basis that in the former class of cases there were receipts actual or constructive and in the latter class of cases there were no receipts but only remissions; It is also mentioned with reference to the decision in Mohshin Rehman Penkar v: Commissioner of Income-tax that:

' It may be noticed that in this case there was a remission and not a refund; Secondly, the system of accounts adopted and accepted by the taxing authorities in that case was the mercantile system of accounting; Therefore, this decision can be of no assistance in deciding the question referred to us: But this decision and some other decisions to which reference will be made presently did hold that if there is only a remission and the assessee has been maintaining accounts according to the mercantile system of accounting, the taxing authorities could not levy tax on the sums remitted during the subsequent years. '

4. On the basis of this distinction, the Mysore High Court came to the conclusion that the case before it fell within the principle of the earlier set of cases, in that the assessee followed the cash system of accounting and that there was actual refund of the kist due and this distinction has apparently been approved by the decision of the Patna High Court in Commissioner of Income-tax v. Rohtas Industries Ltd., [1968] 68 I.T.R. 141 (Pat.). Counsel for the assessee contended before us that since this is a case where the assessee followed the mercantile system of accounting and since there was no actual receipt of the amount or constructive receipt of the amount but only remission, the decision in Commissioner of Income-tax v. Rohtas Industries Ltd. must be followed by this court and the question referred answered in the assessee's favour.

5. It appears to us, with great respect to the elaborate judgment inCommissioner of Income-tax v. Lakshmamma, that the question cannot bemade to depend either on the system of accounting or on the basis whetherthere was actual or constructive receipt of the cash or there was onlyremission. Even in the mercantile system of accounting no deductions canbe claimed unless the deduction claimed related to a liability that hadaccrued. Similarly in the case of entries relating to receipts there can beno entry in a mercantile system of accounting unless the amount coveredbe the entry had actually become due to the assessee. The differencebetween the cash system and the mercantile system is only that a particularassessee considered it convenient for the purpose of his business to includein his accounts expenditure and income as soon as the liability towards theexpenses or the right to receive the income, as the case may be, hadcrystallised in the sense that it had accrued. This method of accountingis an acceptable form of accounting for the purpose of income-tax assessments. In the cash ''system of accounting the income-tax department isnot entitled to say that the income that had actually accrued during therelevant previous year but which had not been actually received by theassessee should be taken into account. In the case of the mercantile systemof accounting on a remission being made by a person to whom a debt wasdue from the assessee--a debt which had accrued and relating to which adebit entry had been made in the accounts--a credit entry will have to bemade for the amount remitted so that the accounting may be continuousand consistent, a fact noticed by the Patna High Court in Commissionerof Income-tax v. Rohtas Industries Ltd. In such cases there is certainlyconstructive receipt and, therefore, the distinction between constructivereceipt and remission sought to be drawn by the Mysore High Court, withgreat respect, cannot exist. What then is the true principle to be applied,in cases of this nature which had given rise to conflicting decisions. Ifone is to turn to the House of Lords decision which has been approved bythe Indian High Courts in the decisions in Agarchand Chunnilal v. Commissioner of Income-tax and Orient Corporation, Bombay v. Commissioner ofIncome-tax in search of the principle, the question will have to be posed,was the receipt a trade receipt or not. On the facts of the case before theHouse of Lords the assessee obtained the benefit of large-scale reductionallowed by one of its creditors to whom large sums had become due in aprevious year. Lord Thankerton, dealing with the question whether thebenefit of this remission had resulted in accrual of income to the assessee,observed in British Mexican Petroleum Co. Ltd. v. Jackson, [1932] 16 T.C. 570, 592,593 (H.L.):

' My Lords, I am of opinion in the present case, that the account to 30th June, 1921, cannot be reopened, as the amount of the liability there stated was correctly stated as the finally agreed amount of the liability and the subsequent release of the respondents proceeds on the footing of the correctness of that statement.

The appellant's alternative contention, which was not seriously pressed by the Attorney-General, is equally unsound, in my opinion. I am unable to see how the release from a liability, which liability has been finally dealt with in the preceding account, can form a trading receipt in the account for the year in which it is granted. '

6. In this view Viscount Dunedin and Lord Atkin agreed. Lord Macmillan expressed himself slightly differently :

' I say so for the short and simple reason that the appellant-company did not, in those eighteen months, either receive payment of that sum or acquire any right to receive payment of it. I cannot see how the extent to which a debt is forgiven can become a credit item in the trading account for the period within which the concession is made. '

7. These observations mean that the benefits resulthig from a remission will not amount to a trade receipt and will not, therefore, give rise to income for the purpose of income-tax assessment. It appears to us that there will be no distinction between a release or a remission on the one hand or a receipt, actual or constructive, on the other; for a receipt, we conceive, will also not be a trading receipt.

8. We have been confronted with a decision of the Bombay High Court in In re Union Bank of Bijapur and Sholapur Ltd., wherein Beaumont C. J. had, on a very brief statement of the law, expressed himself thus :

' The embezzlement was, no doubt, substantially more than the income of that year. In a subsequent year a sum is found to have been recovered in respect of that embezzlement, and it seems to me that the assessee, having alleged that the embezzlement was an embezzlement of income, which could properly be set off against income, in a previous year cannot affirm in another year that it was not income and that a recovery in respect of it is a casual appreciation of capital, as he seeks to do.'

9. As we understand this decision, the principle behind it is that money embezzled from an assessee retains the character of income of the assessee in the hands of the person who embezzled the money and when he either returns it to the assessee, or when it is recovered by the assessee, it comes back to the assessee as his income, the amount not having changed its character. In the meanwhile that income had not been taken into account in any assessment year as, under the Income-tax Act, it was deductible as a loss arising from the carrying on of the business. It is only in such peculiar cases, we think that the rule in that decision can be applied. We think the same principle has been applied by Finlay J. in Gray v. Lord Penrhyn, [1937] 21 T.C. 252 (K.B.) in a case of misappropriation committed by the officials of a slate quarry, but not detected by the auditors who later on made good the amount. The principle behind these decisions cannot be pressed into service in cases where the creditor due to generous considerations or to be more realistic when he finds that it is necessary for the very purpose of his business that the assessee from whom he had claimed large amounts by way of interest or price of goods or as remuneration payable for services rendered has to be helped in continuing his business and, therefore, either gives up his right to receive the amounts that had accrued due or returns the amounts which he had actually received. The money that had either been given up or had been refunded is money that belonged to the creditor which could no longer be the income of the assessee and it comes to the assessee in the form of a windfall. This aspect had been noticed very clearly in the judgment of Rowlatt J., his judgment which gave rise to the decision of the House of Lords in British Mexican Petroleum Co. v. Jackson. In such cases the money received is not the income of the assessee; we think that it is to cover cases of this nature that Sub-section (2A) of Section 10 was introduced in the Indian Income-tax Act of 1922 and reintroduced in the form of Section 41 of the Income-tax Act, 1961. The learned judges of the Mysore High Court, on a very exhaustive survey of the decision in Commissioner of Income-tax v. Lakshmamma, came to the conclusion that the general law even before Section 10 was amended by introducing Sub-section (2A) was such as to enable the benefit accruing from remissions or benefit accruing from payment made by a creditor being taxed. With very great respect we do not think this is a correct statement of the law.

10. Some of the decisions that have been referred to proceeded on an entirely different basis, which had been noticed by Rowlatt J. in his judgment in British Mexican Petroleum Co. v, Jackson, that in cases where either the price of goods delivered had not been finally settled or the amount payable towards remuneration for services rendered had not been finally agreed upon and, therefore, negotiations were in progress and it was finally settled only in a subsequent year, it is the figure that is finally settled that should be taken into account. In such cases it is the principle of the decision in Severne v. Dadswell, [1954] 35 T.C. 649 ; [1954] 3 All E.R. 243 (Ch. D.), very briefly stated in the words of Roxburgh J. thus, that must apply:

' But a study of the cases under the able guidance of counsel has con- ' vinced me, however, that the relevant question is not whether at the date of retirement there was any outstanding book debt or any contingent or defe'r-red legal or equitable right, but whether any work had been done in the course of trade in respect of which the reward had not been finally settled, or, in other words, anything outstanding in the nature of, or analogous to, a book debt.'

11. A number of decisions in support of this principle have been referred to in that judgment and if we may say so with respect that principle has been followed by the Madras High Court in Gajapathi Naidu v. Commissioner of Income-tax. The Madras High Court, however, held that the income so arising from the final settlement is income of the year during which the services had been rendered and can, therefore, be assessed only in that year and not in the year in which the remission was made or final settlement was made. In an appeal from the decision, the Supreme Court in Commissioner of Income-tax v. A. Gajapathy Naidu, [1964] 53 I.T.R. 114 (S.C.) reversed this view and held that the income could be assessed in the year in which it was received or final settlement was made whereby it accrued. We are not called upon to decide the question in which year the income was to be assessed and if we had been called upon to decide that question, we would naturally have followed the decision of the Supreme Court that it must be assessed in the year in which the settlement was made. This question does not arise here.

12. Apart from the principle stated in the decision in Severne v. Dadswell, when a year's account has been finally settled with reference ;to the liabilities, there can be no question of reopening that year's assessment made on that factual and real basis. The only question then is whether what has been given up by a creditor in favour of an assessee or returned to him can be said to be income of the assessee. We find it difficult to accept the proposition that it would be income. What was returned to the assessee has nothing to do with the activities of the assessee; it does not arise from the business nor docs it arise from agricultural operations when the assessee is an agriculturist. The principle of the decision of the House of Lords case must apply to such a case.

13. We answer the question referred to us in the affirmative, that is, in favour of the assessce and against the department. As we indicated at the beginning, since the question is a somewhat difficult one and the decisions have not all been uniform, the reference is justified and for these reasons we direct the parties to bear their costs.

14. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be sent to the Appellate Tribunal as required by Sub-section (1) of Section 260 of the Income-tax Act, 1961.


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