1. At the instance of the revenue, the following common question has been referred to this court for its opinion by the IT Appellate Tribunal :
'Whether on the facts and in the circumstances of the case the entire interest income received by the assessee on the enhanced compensation cannot be assessed to tax on receipt basis and only the proportionate interest referable to assessment years 1969-70 and 1970-71 alone can be brought to tax ?'
2. The assessee with his three brothers owned lands in Uppilipalayam village in Coimbatore District. The Government acquired some of these lands in three separate proceedings on the basis of three separate proceedings on the basis of three separate notifications u/s. 4(1) of the Land Acquisition Act issued on 17-4-1957, 20-1-1961 and 16-4-1969. The compensation originally fixed was enhanced by courts and the assessee, as a result of the order passed by the courts, was entitled to receive interest on the enhanced compensation and the interest received on enhanced compensation was Rs. 33,000 for the asst. yr. 1969-70 and Rs. 15,799 for the asst. yr. 1970-71. Since the assessee has not maintained books of account and had actually received these amounts in the asst. yrs. 1969-70 and 1970-71 the ITO assessed these amounts on receipt basis for the asst. yrs. 1969-70 and 1970-71.
3. The assessee filed an appeal before the AAC contending that the interest should have been assessed on accrual basis and not on receipt basis. The AAC agreed with the assessee's contention and held that the interest accrues each year and is payable as such after possession was taken from the assessee and, therefore, the interest income was assessable on accrual basis and not on receipt basis and that the interest on accrual basis works out to Rs. 1,484 for the asst. yr. 1969-70 and Rs. 3,313 for the asst. yr. 1970-71.
4. The revenue took the matter in appeal to the IT Appellate Tribunal contending that as no regular system of accounting was followed by the assessee the best method by which the interest income can be brought to assessment was on receipt basis and that the ITO was fully justified in assessing the interest on enhanced compensation on receipt basis for the asst. yrs. 1969-70 and 1970-71. The assessee's contention before the Tribunal was that the entire interest received on the enhanced compensation could not be assessed in the asst. yrs. 1969-70 and 1970-71 on receipt basis and that they have to be spread over for the various for which they had accrued and that as the interest accrues each year only the proportionate interest referable to the asst. yrs. 1969-70 and 1970-71 alone can be brought to tax. On these rival contentions, the Tribunal had held that since the interest is payable only where the owner is deprived of his property and the payment of compensation is deferred and since the benefit which the owner lost from the acquired property is a benefit acquiring in each year which is compensated by way of interest u/s. 34, that the interest accrues year after year after dispossession of the land under the Land Acquisition Act and that the proportionate interest referable to asst. yrs. 1969-70 and 1970-71 alone can be brought to tax on the accrual basis. In support of the said view the Tribunal relied on the following decisions : CIT v. V. Sampangiramaiah : 69ITR159(KAR) and CIT v. Dr. Sham Lal Narula . Aggrieved by the order of the Tribunal, the revenue has sought and obtained a reference on the question set out above.
5. Before the assessing authority the assessee seems to have contended that the interest income to have contended that the interest income is a capital receipt and, therefore, it cannot be brought to charge. The ITO has, however, rejected the contention and held that the interest income is clearly a revenue receipt and as such taxable. He also referred to the fact that in the case of the assessee's brothers who received similar interest the same has been offered for assessment and taxed on receipt basis. Before the AAC the assessee has again reiterated his contention that the interest income is a capital receipt but the AAC held that it is only a revenue receipt relying on the decision of the Supreme Court in T.N.K. Govindarajulu Chetty's case : 66ITR465(SC) . However, the AAC upheld the assessee's contention that the interest income is to be charged on accrual basis and not on receipt basis relying on the decision of the Punjab and Haryana High Court in the case of Dr. Sham Lal Narula . When the matter was taken to the Tribunal, it agreed with the view taken by the AAC relying on the decisions in CIT v. V. Sampangiramaiah : 69ITR159(KAR) and CIT v. Dr. Sham Narula . The view taken by the Tribunal is that in all cases where interest is payable on enhanced compensation it accrues year after the assessee was deprived possession of the land under the provisions of the land Acquisition Act and, therefore, the interest income can be assessed only on accrual basis irrespective of the fact whether the assessee maintains accounts on cash basis or on mercantile basis. The question is whether the view taken by the Tribunal can legally sustained.
6. In this case the Tribunal has given a specific finding that the assessee has not maintained any books of account and that he had actually received sums of Rs. 33,000 in the asst. yr. 1969-70 and Rs. 15,799 in the asst. yr. 1970-71. However, it has chosen to accept the contention of the assessee that interest income has to be accrual basis and the method of accounting followed by the assessee is material. We are not, however, inclined to agree with this extreme contention s. 145 of the IT Act, 1961 deals with the method of accounting. Sub-s. (1) of the s. 145 says that the income chargeable under head 'income from other sources' shall be computed in accordance with the method of accounting regularly employed by the assessee. Sub-s. (2) says that where the ITO is not satisfied about the correctness or where no method of accounting has been regularly employed by the assessee, the ITO may make an assessment in the manner provided in s. 144. Since admittedly in this case the assessee has not followed any method of accounting the assessment has necessarily to be made by the ITO on best Judgment basis. Section 56 deals with the income from other sources. Sub-clause (1) of that section says that income of every kind which is not to be excluded the total income under the Act shall be chargeable to income-tax under the head 'income from other sources', if it is not chargeable to income-tax under any of the heads specified in s. 14, Items A to E. Having regard to the above provisions in s. 56 the income by way of interest on compensation can only be assessed as income from other sources. If there is no method of accounting as in this case the ITO is free to choose his own basis and manner of assessment. In the case of Mewar Industries Ltd. v. CIT, Delhi a distinction has been made between a trader and a non-trader with reference to the method of accounting. A similar distinction has also been made in Whiteworth Park Coal Co. Ltd. v. IRC (1960) 40 ITR 517. In the latter case the House of Lords has laid down that there no method of accounting has been regularly employed, a non-trader cannot be assessed, generally speaking, u/s. 56 under the head 'income from other sources' in respect of money which he has not received. In the former case the court had held that if no method of accounting has been regularly employed, a non-trader can be assessed only on receipt basis. As pointed out by Rowlatt, J. in Leigh v. Inland Revenue 11 Tax Cases 590, for income-tax purposes receivability without receipt is nothing and this principle applies to a restricted number of cases where the provisions of the Act or the assessee's method of accounting require receipt as the solid test of taxability. Therefore, it is stated by the revenue the receivability or accrual can be adopted only in cases where the assessee's method of accounting required accrual as the test of taxability. If in cases where the receiptability or accrual does not apply, the income cannot be brought to charge if it has not been received.
7. Section 13 of IT Act, 1922 corresponding to s. 145 of the 1961 Act camp up for consideration before the Supreme Court in Keshav Mills Ltd. v. CIT : 23ITR230(SC) where the court held that is dealing with the method of accounting s. 13 an integral part of the computation of the total income by the assessee and, therefore, it is compulsory on the income-tax authorities as well when computing the total income to accept the mode of accounting regularly adopted by the assessee except in case where the proviso to s. 13 is applicable. The proviso to s. 13 corresponds to Sub-s. (2) of s. 145 of the 1961 Act. Therefore, where no method of accounting is regularly employed by the assessee the ITO can proceed to compute the income on any basis of accounting the chooses. In Whiteworth Park Coal Co. Ltd. v. IRC (1960) 40 ITR 517 a distinction has been made, as already stated, between a trader and a non-trader with reference to the method of accounting and how the computation has to be made with reference to the income of a non-trader as could be seen from the following passages :
'the word 'income' appears to ne to be the crucial word, and it not easy to say what it means. The word is not defined in the Act and I do not think that it can be defined. There are two different currents of authority. It appears to me to be a quite settled that in computing a trader's income account must be taken of trading debts which have not been received by the trader. The price of goods sold or services rendered is included in the year's profit and loss account although that price has not yet been paid. One reason may be that the price has already been earned and that it would give a false picture to put the cost of the producing the goods of rendering the services into has accounts as an outgoing but the put nothing that until the price has been paid. Good accounting practice may require some exceptions, I do not know, but the general principle has long been recognised. And if in the end the price is not paid it can be written off in a subsequent year as a bad debt. But the position of an ordinary individual who has no trade or profession is quite different. He does not make up a profit and loss account. Sums paid to him are his income, perhaps subject to some deductions, and it would be a great hardship to require him to pay tax on sums owing to him out of which he cannot yet obtain payment. Moreover, for him there is nothing corresponding to a trade writing off said debts in a subsequent year, except perhaps the right to get back tax which he has paid in error.'
The court has further observed :
'The case has often arisen of a trader being required to pay tax on something which he has not yet received and may never receive, but we are informed that there is no reported case where a non-trader has had to do this whereas there are at least three cases to the opposite effect : [Lambe v. Inland Revenue Commissioner 18 Tax Cases 21, Dewar v. Inland and Revenue Commissioners 51 T.L.R. 536 and Grey v. Tiley 16 Tax Cases 414, and I would also refer to what said by Lord Wrenbury in St. Lucia Usines and Estates Co. Ltd. v. St. Lucia (Colonial Treasurer) (1924) AC 508 . I certainly think that it would be wrong to hold now for the first time that a non-trader to whom money is owing but who has not yet received it must bring it into his income-tax return and pay tax on it. And for this purpose I think that the company must be treated as a non-trader, because the Butterfly's case (1957) A.O. 32 makes it clear that these payments are not trading receipts'.
Therefore, in cases where no method of accounting is regularly employed by an assessee, the method of computation will generally depend on the question as to whether the assessee is a trader or a non-trader. If interest income has been received by a non-trader who is not expected to adopt regular method of accounting, assessment can be made on receipt basis and not on accrual basis. The decision of the Supreme Court in CIT v. Chunnilal : 82ITR54(SC) throws some light on this question.
In that case the assessee held the managing agency of a public limited company and under the managing agency of a public limited company and under the managing agency agreement the assessee was to continue as managing agents for a minimum period of 21 years. However, the directors of the managed company passed a resolution on 23-4-1951 terminating the service of the assessee as managing agents. There was a dispute about the compensation payable to the assessee. The assessee filed a suit claiming damages at the rate of Rs. 6,000 p.m. for the unexpired period of the agency. The suit was declared for Rs. 2,34,000 on 17-11-1955 and the assessee received the amount in December, 1955. It was contended before the ITO that as it maintained accounts in the mercantile system and the amount had become due even in 1951, the same could not be taxed in the asst. yr. 1956-57 during which the compensation was received. The ITO rejected the assessee's contention and finalised the assessment on receipt basis. When the matter went before the Tribunal it, however, held that the compensation became due to the assessee on 23-4-1951 when the managing agency was terminated and, therefore, the same cannot be assessed in the asst. yr. 1956-57 on receipt basis. The High Court held that the compensation became due to the assessee on 22-4-1951 when the managing agency was terminated and, therefore, the same cannot be assessed in the asst. yr. 1956-57 on receipt basis. The High Court held that the compensation amount was not taxable in the year 1956-57 but the interest thereon could be taxed in that year. When the matter was taken to the Supreme Court, the Supreme Court, agreeing with the High Court, held that the assessee's right to get compensation arose on 23-4-1951 when the resolution terminating the managing agency was passed and, therefore, it cannot be assessed in the year 1956-57, when the amount was actually received as the assessee was maintaining mercantile system of accounting. The Supreme Court had also affirmed the view taken by the High Court that so far as the interest on the compensation is concerned, it has to be assessed only in the year 1956-57 when it was actually received. The decision in T.N.K. Govindarajulu Chetty v. CIT : 87ITR22(Mad) to which one of us was a party and also the decision in CIT v. M.K.K.R. Muthukaruppa Chettiar : 145ITR175(Mad) to which also one of us was a party appear to be relevant in this regard. In the first case it has been pointed out that where a statute brings to charge certain income. Its intention is to enforce the charge at the earliest point of time, that if the income had accrued earlier and the assessee treats is as taxable during the year of accrual, it is not open to the revenue, to treat it as an income in the year if receipt in a case where the assessee follows the mercantile basis of accounts and that in order to ascertain method of accounting adopted by the assessee it is not necessary to cut up the various sources, profits and gains and find to the method adopted in relation to each source of income. That was also a case relating to the interest payments arising out of the delayed payment of the compensation for the lands acquired. The court held that the liability to pay interest would arise that the liability to pay interest would arise when the compensation amount due to the assessee had not been paid in each of the relevant years and the method of accounting of the assessee being mercantile the accrual of interest will have to be spread over the years between the date of acquisition and the date of acquisition and the date of actual payment. This decision proceeds on the basis that interest income received by a trader need not always be assessed on receipt basis and that if there is a statutory liability to pay interest it can be assessed on accrual basis. In the second case, the court was concerned with certain refund to which the assessee became entitled by way of excess tax paid. Through the refund became due on 5-6-1965 as per s. 244 of the IT Act, 1961, the refund was actually granted only on 16-6-1971. The interest of Rs. 77,844 payable on the delayed refund was paid on 24-9-1971 in the asst. yr. 1972-73. The assessee's claim that the interest related to the asst. yrs. 1966-67 to 1972-73 and only a sum of Rs. 2,632 which had accrued in the asst. yr. 1972-73 was assessable in that assessment year was negatived by the ITO but was upheld by the Appellate Tribunal. When the matter reached this court, this court held that where there is a statutory liability, the method of accounting is not quite relevant, and, in such a case, the time of accrual alone should be taken as the basis for assessment and, therefore, the Tribunal was right in its view that only Rs. 2,632 accrued during the assessment year in question and hence it was only this amount that should be included for assessment. It is found that the said decision is based on the fact that the liability to pay interest is a statutory liability fastened on the assessee by s. 244 of the IT Act which is an mandatory form. Section 34 of the Land Acquisition Act, which provides for payment of interest on the amount of compensation awarded, uses the expression 'the collector shall pay the amount awarded with interest thereon at the rate of 6 per cent p.a. from date of taking possession.' The same view has been taken in Joyanarayan Panigrahi v. CIT (1972) 93 ITR 102 and CIT v. Santi Devi : 139ITR489(Cal) . In Joyanarayan Panigrahi v. CIT : 93ITR102(Orissa) the Orissa High Court has held on more or less similar circumstances that the IT authorities are not justified in including the amount of interest income in the year of receipt but if should be spread over for the various earlier years on accrual basis. According to the court the legal position is settled that if income has accrued during any particular year it is not open either to the assessee or to the ITO to take the Income into consideration in any other year, that the right to receive interest under the Land Acquisition Act is based on the concept that the owner of the land entitled to receive compensation is kept out of the land by being dispossessed and had not received the compensation representing the market value of such land and that interest accrues during the intervening period between the dispossession on one side and payment of compensation on the other as a result of the statutory provisions and that the right to receive interest was not contingent but absolute and only the amount thereof awaited quantification. CIT v. Santi Devi : 139ITR489(Cal) also is a similar one. In that case the assessee's land was acquired in 1950 and a sum of Rs. 1.4 lakhs was paid as compensation. In 1961, a sum of Rs. 86,208 was paid as interest on the compensation u/s. 34 of the Land Acquisition Act. The question arose whether the entire sum of Rs. 86,208 was assessable in the asst. yr. 1962-63 when the amount was actually received. The Calcutta High Court had held that the entire amount of interest of Rs. 86,208 received during the asst. yr. 1962-63 was not liable to be assessed in that year and only a proportionate amount which pertained to the relevant previous year should be assessed in that year.
8. On the facts of this case we are of the view that the principle laid down by this court in CIT v. M. K. KR. Muthukarupan Chettiar : 145ITR175(Mad) will have to apply as the payment of interest on the compensation is a statutory liability which is conditional but absolute. As soon as the lands are acquired, the assessee gets the right to compensation as also interest if there is a clear in payment of the compensation u/s. 34 of the Land Acquisition Act. Whatever be the method of accounting, the amount accrue to the assessee under the statute. Therefore, the interest income should be deemed to accrue to the assessee year after year after the acquisition has taken place as the assessee has been deprived of his land by compulsory acquisition. The distinction sought to be made by the ld. counsel for the revenue is that since the assessee has not maintained any account he should be taken to be a non-trader and that in case of non-traders interest income can be assessed on cash basis. We are not inclined to accept the said contention for the reason that the decisions in White worth Park coal Co. Ltd. v. IRC (1960) 40 ITR 517 and Mewar Industries Ltd. v. CIT dealt with cases arising out of contract and not in respect of interest income arising out of a statutory liability. The decision in CIT v. Chunnilal : 82ITR54(SC) also related to a case where the court awarded interest on damages for the wrongful termination of the managing agency agreement which cannot be said to be a statutory liability. The principle of those decisions cannot, therefore, apply to the case on hand.
9. In this view we have to agree with the decision of the Tribunal in this case. The question referred is, therefore, answered in the affirmative and against the revenue.