1. The assessee. shri M. K. KR. Muthukaruppan Chettiar, and his sons along with his father, Karuppan Chettiar (Since deceased), formed an HUF which owned certain properties and business in India and Penang and also some interest in certain firms in Keddah, Kungayaigone and Coloroon. The assessments were made on the above entity as an HUF till 1948-49. In the course of assessment proceedings for 1949-50, a claim was made by the assessee that there has been partition between a Karuppan Chettiar on the one hand and Muthukaruppan Chettiar and his sons on the other. The ITO, however, rejected the claim for partition and assessed the HUF for the three years 1950-51, 1951-52, and 1952-53, treating Karuppan Chettiar's returns as the proper returns for the family. By his order dated June 18, 1953, the ITO closed the assessments in the case of the family of Muthukaruppan Chettiar observing that he had already held that there was no division between Karuppan Chettiar and Muthukaruppan Chettiar, and, therefore, the file had to be clubbed only with the file of the father, Karuppan Chettiar. He further stated that if for any reason it was ultimately held that the claim for partition has to be accepted, it would be possible to take action under s. 34 of the Indian I.T. Act, 1922. On appeal against the assessments made by the ITO on the family of Karuppan Chettiar, the AAC by his order dated December 18, 1954, held that there was a complete partition, and, therefore, the order of the ITO on the basis of the continued existence of the HUF had to be cancelled.
2. The ITO, for the purpose of giving effect to the order of the AAC, issued notices under s. 34 of the Indian I.T. Act on March 2, 1957, to the family of Muthukaruppan Chettiar for the three assessment years 1950-51 to 1952-53, after obtaining the previous approval of the Commissioner. In response to the said notices, Muthukaruppan Chettiar submitted returns on April 9, 1957, for the three assessment years under protest. On the basis of the returns filed, the ITO made assessments on Muthukaruppan Chettiar ignoring his protest. Muthukaruppan Chettiar appealed to the AAC, but the appeal was dismissed. The matter was taken to the Appellate Tribunal, but without success. It was then taken to the High Court. The High Court by judgment dated September 16, 1964, held that the reassessment for the year 1952-53 was valid, but the asssessments for the earlier two years 1950-51 and 1951-52 were invalid. On appeal, the Supreme Court held that the reassessments for all the three years were invalid. The decision of this court was given effect to by the Appeallate Tribunal by their order dated December 5, 1964.
3. As a result thereof, the taxes collected on the basis of the impugned assessments for 1950-51 and 1951-52 amounting to Rs. 36,434 and Rs. 1,51,792, respectively, had to be refunded. The refund was, however, granted only on June 16, 1971, though it became due on June 5, 1965, as per s. 244. The interest on delayed refund from June 5, 1965, to June 16, 1971, calculated at 6% up to September 30, 1967, and at 9% from October 1, 1967, to June 16, 1971, came to Rs. 77,844. This interest was actually paid on September 24, 1971, in the assessment year 1972-73. Muthukaruppan chettiar sought to have this amount spread over from the 1966-67 to 1972-73 in the following manner.
----------------------------------------------------------------------Assessment Period InterestYear Rs.----------------------------------------------------------------------1966-67 5-6-1965 to 12-4-66 - 10 months and 7 days at6% on Rs. 1,64,547 8,4061967-68 13-4-66 to 12-4-67 - one year at 6% 9,8731968-69 13-4-67 to 30-9-67 - 5 months and 7 days at6% and 1-10-67 to 12-4-68 - 6 months and 15days at 9% 12,5061969-70 13-4-68 to 12-4-69 - One year at 9% 14,8091970-71 13-4-69 to 12-4-70 - One year at 9% 14,8091971-72 13-4-70 to 12-4-71 - One year at 9% 14,8091972-73 12-4-71 to 16-6-71 - 2 months and 4 days 2,632----------------------------------------------------------------------Total 77,844----------------------------------------------------------------------
4. The ITO rejected that plea. On appeal, the AAC, however, observed that the interest in this case was to be assessed on accrual basis from 1960-61 on wards, that interest on the delayed refund which became due on June 5, 1965, would similarly be liable to be assessed on accrual basis only from year to year and that there was no justification for assessing the entire amount of Rs. 77,844 in the year of receipt 1972-73 on the basis of the actual receipt. He, therefore, held that the interest of Rs. 2,632 only had accrued for the period from April 12, 1971, to June 16, 1971, and that amount alone could be assessed in the assessment year in question.
5. The Revenue took the matter on appeal to the Income-tax appellate Tribunal contending that the AAC erred in holding that the interest on the delayed refund should be assessed on accrual basis as against the receipt basis adopted by the ITO, and that the interest received by the assessee on account of the delayed issued of the refund should be assessed on receipt basis only. It was submitted by the Revenue before the Tribunal that the assessee did not maintain any books of accounts and did not follow any system of accounting, and, therefore, the receipt basis should be adopted in the assessee's case. In support of its submission, the Revenue relied on the following decisions : 1, CIT v. T.S PL.P. Chidambaram Chettiar : 80ITR467(SC) , 2. CIT v. Smt. Sankari Manickyamma : 105ITR172(AP) , 3 CIT v. A. Gajapathy Naidu : 53ITR114(SC) .
6. The Tribunal, after considering the said decisions and after referring to the factual circumstances, held that the assessee is entitled to receive interest on delayed refunds as a result of the statutory provisions, that though a lump sum of Rs. 77,844 was paid during the previous year relevant to the assessment year 1972-73, the entitlement for interest has accrued even as early as June 5, 1965, when the refund become due as per s. 244 and, therefore, the AAC was right in holding that only a sum of Rs. 2,632 had accrued as interest during the accounting year relevant to the assessment year in question, and the at the Revenue was not justified in proceeding to assess the entire sum of Rs. 77,844 as an amount accrued during the assessment year in question.
7. Aggrieved by the decision of the Tribunal, the Revenue has sought and obtained a reference to this court on the following question under s. 256(1) of the I.T. Act, 1961 :
'Whether, on the facts and in h circumstance of the case, the Tribunal was right in holding that though the sum of Rs. 77,844 was received by the assessee in a lamp sum during the previous year relevant to the assessment year 1972-73, only a sum of Rs. 2,632 accrued to the assessee as interest for the said assessment year under section 243 of the Income-tax Act, 1961 ?'
8. In this case, there is no dispute regarding the factual position. If the accrual basis is adopted, the entire sum of Rs. 77,844 received during the previous year relevant to the assessment year 1972-73, cannot be assessed in that year, for, only a sum of Rs. 2,632 accrued during that year, the rest of the amount having accrued in the prior assessment years. It is also not in dispute that on June 5, 1965, the interest had become due on the delayed refund as per s. 244 of the I.T. Act. It is also not in dispute that the assessee in this case has submitted return in the earlier years showing the accrued it rest as part of his income during the relevant years. The question is whether, on the facts and circumstances of the case, the entire interest income of Rs. 77,844 received during the assessment year 1972-73 could be assessed in the assessee's hands. For a proper consideration of the said question, it is necessary to refer to the statutory provisions dealing with the liability of the Revenue to pay interest on the delayed refunds.
9. Chapter XIX of I.T. Act 1961, deals with 'Refunds'. Section 240 is to the effect that where, as a result of any order passed in appeal or other proceeding under this Act, refund of any amount becomes due to assesssee, the ITO shall refund the amount to the assessee without his having to make any claim in that behalf. In this case, admittedly, as a result of the judgment of this court, the assessment made by the ITO, on the basis of which income-tax had been paid by the assessee stands set aside and this has resulted in the assessee becoming entitled to the refund of the amount of tax paid by him. Section 244(1) of the Act provides that :
'Where a refund is due to the assessee in pursuance of an order referred to in section 240 and the Income-tax Officer does not grant the refund within a period of six months from the date of such order, the Central Government shall pay to the assessee simple interest at nine per cent. per annum on the amount of refund due from the date immediately following the expiry of the period of six months aforesaid to the date on which the refund is granted.'
10. The statutory rate of interest has been changed from time to time from six per cent. to 12 per cent. during the period between the date from which the interest became payable and the date of payment, i.e., from June 5, 1965, to June 16, 1971. Thus, in this case, the interest became payable on June 5, 1965, under s. 244. Therefore, the liability of the Central Govt. to pay interest had accrued even on June 5, 1965. Section 244 specifically provides that if refund is not made within a period of six months from the date of such order, interest at a specified rate is payable. In this case, it is not disputed that the liability to pay interest under s. 244. of the Act arose on June 5, 1965, and that the actual payment was made only the year 1971. Both the AAC and the Tribunal have held that the statutory liability to pay interest having arisen on June 5, 1965, entitlement to interest should be taken to have accrued statutorily since June 5, 1965. Since the sum of Rs. 77.844 is the amount of interest accrued for the period from June 5, 1965, to June 16, 1971, the amount of interest has to be treated as the income accrued during that period, and, therefore, the said interest income has to be spread over for the various assessment years commencing from 1966-67 to 1972-73. the sum of Rs. 77,844 received on June 16, 1971, as the interest due to the assessee for the period from June 5, 1965, to June 16, 1971, cannot in any sense be treated as the income of the year 1972-73.
11. On the facts of this case, the question for consideration is whether the accrual or the actual receipt should be taken as the basis. Both the AAC and the Tribunal have held that the date of accrual alone should be taken as the basis, and not the actual receipt. On a due consideration of the matter, we are inclined to agree with their view that the accrual basis alone should be adopted in this case and not the receipt basis. In this case, the assessee included in his returns filed for the years 1966-67 to 1971-72, the interest accrued for those years for purpose of assessment, which is also a relevant factor to taken into account. The assessee is said to be adopting the hybrid system of accounting. What ever be the method of accounting that was followed by the assessee, the fact remains that the assessee adopting the accrual basis had offered the interest income accrued during the relevant assessment years for the purpose of assessment. If the assessment were to be made for the year 1972-73 of receipt basis, there will be a double tax on the same income which has been subjected to tax in the earlier assessment years. Apart from this fact, it cannot be disputed that though the sum of Rs. 77,844 was actually received during the assessment year 1972-72, the payment was in respect of the interest liability that arose for the years 1966-67 to 1972-73, and the interest amount due to the assessee for the assessment year 1972-73 was only Rs. 2,632.
12. The learned counsel for the Revenue contends that since the refund due to the petitioner was in relation to the assessment year 1950-51 1951-52 and 1952-53, if the spreading over is allowed, it should be spread over in those years and not for the years 1966-67 to 1972-73. We are not in a position to appreciate the said contention advanced on behalf of the Revenue. The refund order no doubt relates to the assessment years 1950-51, 1951-52 and 1952-53, but the interest payments which are the subject matter of reference cannot relate to the years 1950-51, 1951-52 and 1952-53, but they can relate only to the years 1966-67 to 1972-73, during which period the interest became due, as the liability to pay interest as per s. 244(1) of the Act accrued on or after June 5, 1965, and not earlier. Therefore, the interest receipts amounting to Rs. 77,844 cannot be said to relate to the assessment years 1950-51, 1951-52 and 1952-53.
13. The learned counsel for the Revenue then contends that the receipt basis alone should be adopted, and the accrual basis should not be adopted. We are not in a position to accept the said contention for the reason that merely because the amount was paid during the previous year relevant to the assessment year 1972-73, the interest payments cannot be taken to be the income of the assessee for the said assessment year, for the interest income has accrued from June 5, 1965, till June 16, 1971, when the refund was given.
14. This view of ours finds support from the decision of this court in T.N.K. Govindarajulu Chetty v. CIT : 87ITR22(Mad) , to which one of us was party. That case also related to interest payment on the compensation amount which was payable by the Government for a property acquired under the provisions of the Land Acquisition Act. Though the property was acquired in the year 1949, the compensation payable to the assessee by the Government was ultimately fixed at Rs. 5,00,000 and the Government paid the same in two instalments, one in the assessment year 1955-56 and the other in the assessment year 1956-57. The ITO took the view that the amount paid included a sum of Rs. 1,28,716 representing the interest and apportioned the same in the two years, rejecting the claim of the assessee that it was capital in nature. The AAC held that the interest amount was income, but the same will have to be apportioned and assessed in the respective years when the interest accured due. On appeal both by the assessee and the Revenue, the Tribunal held that the receipt was capital in nature and hence did not go into the question of apportionment. On a reference, this court held that the amount should be treated as income, and remitted the matter to the Tribunal to decide the other question regarding apportionment of the same. The decision of this court was ultimately upheld by the Supreme Court on a further appeal by the assessee. Thereafter, the Tribunal went into the question of apportionment and held that the amount would have to be allocated to the two years in which the amounts were received, viz., 1955-56 and 1956-57. This court, however, disagreed with the view taken by the Tribunal and held 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 would have to be spread over the years between the date of acquisition and the date of actual payment. In that case, a reference has been made to the decision of the Supreme Court in Morvi Industries Ltd. v. CIT : 82ITR835(SC) . The following passage from that case (at p. 840 of 82 ITR) has been relied on (p. 29 of 87 ITR)
'The income can thus be said to accrue when it becomes due. The postponement of the date of payment has a bearing only in so far as the time of payment is concerned, but it does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. There also arises a corresponding liability of the other party from whom the income becomes due to pay that amount. The further fact that the amount of income is not subsequently received by the assessee would also not detract from or effect the accrual of the income, although the non-receipt may, in appropriate cases, be a valid ground for claiming deductions. The accrual of an income is not to be equated with the receipt of the income. That the two, accrual and receipt of income, have different connotations is also clear from the language of section 4 of the Act. Clause(a) of sub-section (1) of section 4 of the Act deals with the receipt of income while the accrual of income is dealt with in clause(b) of that sub-section.''
15. The above passage from the decision of the Supreme Court throws considerable light on the question before us as to whether the accrual or the actual receipt should be taken as the basis. The principle laid down by this court, in the decision cited supra, applies on all fours to the facts of this case. Here also, there is a statutory liability to refund and to pay interest on the amount to be refunded if there is a delay in making refund. The conduct of the assessee in showing in his accounts the interest as having accrued in the respective years from 1966-67 to 1972-73 clearly indicated that the assessee had adopted the accrual basis. It is also not in dispute that the sum of Rs. 77,844, which is the interest actually received during the year 1972-73, represents the interest accrued for the years 1966-67 to 1972-73. On these facts, as pointed out by the Supreme Court in CIT v. Chunilal V. Mehta & Sons P. Ltd. : 82ITR54(SC) , what was relevant to find out is as to when the amount accrued, and not when the amount was actually received.
16. In CIT v. Hira Lal Mittal and Sons : 86ITR463(All) , a Bench of the Allahabad High Court had expressed the view that the method of accounting is not relevant if the accrual of income is by operation of law. In that case, there was a decree passed by a civil court in a sum of Rs. 68,454 against the Government for breach of a contract. The decree amount was realised in the year 1950 along with interest. The amount realised and the interest earned thereon were all credited in the same account of the assessee. the assessee showed the receipt in its return and was taxed on it. Meanwhile, the Government preferred an appeal against the decree in the year 1960 to the High Court and the High Court allowed the appeal and set aside the decree. For the assessment year 1961-62 and 1962-63, the assessee claimed deduction of certain amounts as interest which accrued due in that account and which was refundable to the Government. The question arose whether the said amount was deductible as claimed by the assessee. The High Court held that since the assessee was under a legal obligation to effect restitution of the amounts collected under the decree and the obligation arose on the reversal of the erroneous decree of the trial court, the liability arose on the date when the decree of the trial court was reversed by the appellate court, and that, therefore, the assessee is entitled to the deduction claimed by him as regards the interest which has accrued due on the amount which he is under a legal obligation to effect restitution. One of the points urged before the court in that case was that the assessee had not actually debited these amounts in the accounts. But the court held not actually debited these amounts in the accounts. But the court held that where a liability arises by operation of law, its deduction cannot be denied merely because it has not been entered in the accounts.
17. The above decision clearly lay down that in cases where there is a statutory liability, the method of accounting is not quite relevant and that, in such cases, the time of accrual should be taken as the basis. In this case, it cannot be disputed that out of the sum of Rs. 77,844, only a sum of Rs. 2,632 actually accrued during the assessment year. In this view, we have to agree with the view taken by the Tribunal.
18. The reference is, therefore, answered in the affirmative and against the Revenue. The assessee will have costs from the Revenue. Counsel's fee Rs. 500.