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T.N.K. Govindarajulu Chetty Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 86 of 1965 (Reference No. 29 of 1965)
Judge
Reported in[1973]87ITR22(Mad)
ActsDefence of India Act; Requisitioned Land (Continuance of Powers) Act, 1947 - Sections 5; Income Tax Act, 1922 - Sections 10(1), 10(2) and 66(1); Land Acquisition Act, 1894 - Sections 28 and 34; Income Tax Act, 1961 - Sections 5(1)
AppellantT.N.K. Govindarajulu Chetty
RespondentCommissioner of Income-tax
Appellant AdvocateS. Swaminathan and ;K. Ramagopal, Advs.
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Cases ReferredLaxmipat Singhania v. Commissioner of Income
Excerpt:
.....act, 1961 - whether receipt of interest by assessee assessable to tax - assessee to be assessed on accrual basis or receipt basis depends on method of accounting regularly employed by him and does not depend upon choice of income-tax officer - income by way of interest paid by government for delayed payment of compensation should be deemed to have accrued in relevant year - it should be apportioned and assessed in respective year to extent to which it is relatable - assessee had adopted mercantile basis of accounting - fact that income accrued has not been shown in accounts books by assessee will not make it taxable in later year on receipt basis - answered in favour of assessee. - - 5. it is well established, that, even in respect of a disputed right, if the assessee had adopted a..........income of the assessee, and that in any event the assessee could not claim to be assessed on the accrual basis in respect of the interest as it has not maintained any accounts recording the interest that accrued to him in the relevant years.5. it is well established, that, even in respect of a disputed right, if the assessee had adopted a mercantile method of accounting and if the right has legally accrued to him, the right should be deemed to have accrued in the relevant year even though the dispute as to the right is settled in a later year, either by the court or otherwise.6. it is also equally well settled that once the income has accrued, the accrual is not suspended till the right is quantified. in commissioner of income-tax v. k. r. m. t. t. thiagaraja chetty & co., :.....
Judgment:

Ramanujam, J.

1. The assessee-firm purchased a property known as ' Lutterals Gardens ' on April 2, 1943. This property was requisitioned by the Government of India by a notification issued by the Collector of Madras, on January 30, 1944, under the Defence of India Act, and the same was acquired ultimately by the Government of Madras under Section 5 of the Requisitioned Land (Continuance of Powers) Act, 1947, by a notification dated May 24, 1949, issued by the Collector of Madras. The Collector fixed the compensation payable to the assessee at Rs. 2,40,000. Dissatisfied with the amount of compensation fixed by the Collector for the property acquired, the assessee sought a reference to the arbitrator, the Chief Judge of the Court of Small Causes, Madras, who fixed the compensation payable to the assessee at Rs. 3,67,666 with interest at 6% per annum from May 24, 1949. Against the said award of the arbitrator the assessee filed an appeal to this court in A.A.O. No. 644/195! contending that the compensation awarded was exceedingly low. In the said appeal this court fixed the compensation due to the assessee at Rs. 5,00,000 and confirmed the order of the Chief Judge, Court of Small Causes, Madras, in other respects. On the basis ofthe fixation of compensation by this court, the Government of Madras ultimately paid a total sum of Rs. 6,28,716 to the assessee of which Rs. 2,54,885 was paid in the accounting year ended April 13, 1 955, and the balance of Rs. 3,73,831 was paid during the year ended April 12, 1956.

2. In the assessment of the assessee-firm for the assessment years 1955-56 and 1956-57, the Income-tax Officer took the view that the sum of Rs. 1,28,716 included in the total compensation received by the assessee represented interest and as such has to be treated as income. He, therefore, apportioned the said sum for the two years on the basis of the total receipts and included Rs. 50,592 in the total income of the assessee for the year 1955-56 and Rs. 78,124 for the year 1956-57. The assessee preferred an appeal against the said assessment to the Appellate Assistant Commissioner contending that the entire sum of Rs. 1,28,716 formed part of the Compensation paid and as such it was a capital receipt, and that no part of it was liable for assessment as income. It was also contended by the assessee that, in any event, the sum of Rs. 1,28,716 could not be assessed in the two years alone but should be apportioned and assessed in the respective years to the extent to which the interest is relatable. The Appellate Assistant Commissioner did not accept the first contention of the assessee that the receipt of interest is a capital receipt and not liable for tax, but accepted the latter contention that it should be apportioned and assessed in the respective years when the interest accrued due. The assessee preferred a further appeal to the Tribunal questioning the view that the receipt of interest is not a capital receipt. The revenue also appealed objecting to the apportionment of interest. The Tribunal, however, accepted the contention of the assessee and held that the sum of Rs. 1,28,716 represented capital receipt and was not liable to be taxed as income. In that view it did not consider the question of apportionment of interest. At the instance of the revenue the following questions were referred to this court by the Tribunal under Section 66(1) of the Income-tax Act, 1922.

' (1) Whether the sum of Rs. 1,28,716 is assessable as income under any of the provisions of the Act ?

(2) If the answer is in the affirmative the assessment years in which the amount falls to be assessed by suitable apportionment ?'

On this reference this court held in Commissioner of Income-tax v. T. N. K. Govindarajulu Chetty, : [1964]52ITR867(Mad) that the Government became a debtor to the assessee for payment of true compensation for the acquired land as on May 24, 1949, the date of the notification, and that the sum of Rs. 1,28,716 should be treated as interest on the debt due by the Government and, therefore, was assessable to tax as income in the hands of the assessee. This court, however, left it open to the Tribunal to go into the question ofapportionment of interest afresh. The assessee took the matter to the Supreme Court questioning the view taken by this court that the interest received by the assessee is an income assessable to tax. The Supreme Court in T. N. K. Govindarajulu Chetty v. Commissioner of Income-tax, : [1967]66ITR465(SC) upheld the decision of this court holding that when the owner of the property was dispossessed pursuant to an order of compulsory acquisition, an agreement that the acquiring authority will pay interest on the amount of compensation was implied, that the right of the appellant to interest arose by virtue of the provisions of Sections 28 and 34 of the Land Acquisition Act, 1894, that the arbitrator and the High Court merely gave effect to the right in awarding interest on the amount of compensation and that, therefore, the interest received by the assessee was taxable.

3. Having regard to the ultimate decision of the Supreme. Court that the receipt of interest by the assessee is income assessable to tax, the Tribunal went into the question of the apportionment of interest. It did not accept the view of the Appellate Assistant Commissioner that the income should be apportioned and assessed in the respective years, but confirmed the allocation made by the Income-tax Officer. The assessee, aggrieved against the order of the Tribunal rejecting its plea that only that portion of the interest relatable to the two years 1955-56 and 1956-57 could be included, sought a reference to this court, and the Tribunal has referred the following question for decision:

' Whether, on the facts and in the circumstances of the case, the whole of the sum of Rs. 50,593 and the whole of the sum of Rs. 78,124 were liable to be taxed as income in the assessment years 1955-56 and 1956-57 respectively?'

The above reference was taken up for consideration by this court on December 12, 1968. At that stage there was a controversy between the revenue and the assessee as to the method of accounting adopted by the assessee in relation to the acquired premises for the assessment years in question. Neither the Income-tax Officer nor the Appellate Assistant Commissioner nor the Tribunal had made any reference in their orders to the system of accounting regularly maintained by the assessee. As this court felt that the question of computation of total income in the case has to be decided in the context of the particular method of accounting maintained by the assessee for the relevant assessment years, a finding was called for from the Tribunal in that regard. The Tribunal has thereafter submitted a supplemental statement of the case on May 30, 1969, giving a finding that the method of accounting in respect of income from business and other sources maintained by the assessee for the years 1955-56 and 1956-57 was the mercantile method but that the assessee has not accounted for the receipt of Rs. 1,28,716.

4. The learned counsel for the assessee contends that, having regard to the above finding given by the Tribunal that the assessee's method of accounting was mercantile, its income by way of interest paid by the Government for the delayed payment of compensation should be deemed to have accrued in the relative years, that it should be apportioned and assessed in the respective years to the extent to which it is relatable and that, therefore, it is only that portion of the interest relatable to the two years 1955-56 and 1956-57 that could be included and assessed. The learned counsel for the revenue on the other hand contends that the finding of the Tribunal in its supplementary statement of case that the assessee's method of accounting was mercantile is not precise, that it should be taken to relate only to the business income of the assessee, and that in any event the assessee could not claim to be assessed on the accrual basis in respect of the interest as it has not maintained any accounts recording the interest that accrued to him in the relevant years.

5. It is well established, that, even in respect of a disputed right, if the assessee had adopted a mercantile method of accounting and if the right has legally accrued to him, the right should be deemed to have accrued in the relevant year even though the dispute as to the right is settled in a later year, either by the court or otherwise.

6. It is also equally well settled that once the income has accrued, the accrual is not suspended till the right is quantified. In Commissioner of Income-tax v. K. R. M. T. T. Thiagaraja Chetty & Co., : [1953]24ITR525(SC) their Lordships of the Supreme Court had expressed the view that it is a fallacy to say that profits do not accrue unless and until they are actually computed, that computation of profits whenever it may take place cannot possibly be allowed to suspend their accrual, and that quantification is not a condition precedent to the accrual of the right. In E. D. Sassoon & Co. Ltd. v. Commissioner of Income-tax, : [1954]26ITR27(SC) the Supreme Court again reiterated the same principle. In that case there was an assignment of the managing agency agreement on December 1, 1943. The commission payable to the managing agents under the agreement for the calendar year 1943 was made up and paid to the assignee in 1944. The question was whether in the assessment year 1944-45, the assignee was liable to pay tax on the accrual basis on the whole of the commission or whether tax was payable on a proper apportionment being made between the assignee and assignor of the amounts received by the assignor. The Supreme Court observed :

' It is no doubt true that the accrual of income does not depend upon its ascertainment or the accounts cast by the assessee. The accounts may, be made up at a much later date. That depends upon the convenience of the assessee and also upon the exigencies of the situation. The amount of the income, profits or gains may thus be ascertained later on the accounts being made up. But when the accounts are thus made up the income, profits or gains ascertained as a result of the accounts ate referred back to the chargeable accounting period during which they have accrued or arisen and the assessee is liable to tax in respect of the same during that chargeable accounting period. .....

What has however got to be determined is whether the income, profits or gains accrued to the assessee and in order that the same may accrue 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 materialisation may depend on the contingency that the making up of the accounts would show income, profits or gains.'

This decision proceeds on the basis that once the income has legally accrued to the assessee, that is, the assessee has acquired a right to receive the same though its valuation may be postponed to a future date, the determination or quantification of the amount does not postpone the accrual. In Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, : [1966]59ITR767(SC) the Supreme Court accepted the following definition of the word ' debt ' given by Lindley L. J. in Webb v. Stenton, [1883] 11 Q.B.D. 518 (C.A.)' A debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation, debitum in praesenti, solvendum in futuro.'

According to the above definition, if there was a liability in praesenti, the fact that the amount was yet to be ascertained did not make it any the less a debt due.

7. In this case the assessee has acquired a right in praesenti against the Government to get the compensation for the land acquired even on the date of the notification, and to get interest on the amount of compensation if payment of the same is postponed for some reason or other. From the mere fact that the amount of compensation was fixed ultimately by this court, it cannot be said that the liability to pay either the compensation or the interest thereon arose only on the date of such fixation.

8. A question similar to the one arising in this reference came up forconsideration before the Mysore High Court in Commissioner of Income-tax v. Sampongiramaiah, : [1968]69ITR159(KAR) . In that case the assessee's property was acquiredunder the Land Acquisition Act and possession was taken on February 19, 1949. The Land Acquisition Officer's award was for Rs. 46,000 which was paid to the assessee on December 31, 1949. The compensation was enhanced by the District Judge on February 28, 1951. It was further enhanced by the High Court, and a sum of Rs. 1,15,00,0 representing the value of the land and Rs. 87,265 representing the interest on that sum from the date of delivery of possession up to the date of payment was paid to the assessee on October 12, 1961. The assessee disclosed receipt of the aggregate sum of Rs. 2,02,265 in the assessment year 1962-63 but claimed the whole of that amount as exempt from tax, being a capital accretion. The Income-tax Officer treated only the compensation amount of Rs. 1,15,000 as a capital receipt and the sum of Rs. 87,265 representing the interest paid to the assessee was taken as a revenue receipt. Ultimately the matter was taken in appeal to the Income-tax Appellate Tribunal, The Tribunal took the view that the interest paid to the assessee was taxable, but that only so much of it. which was payable during the relevant previous year could be taxed in the assessment year 1962-63. The correctness of the view taken by the Tribunal was questioned before the High Court. The High Court held that when possession was taken by the Land Acquisition Officer he became liable to pay interest until the amount awarded by him was paid ; that the assessee acquired a right to recover it from him, that the pendency of the proceedings for fixation of the proper compensation could not arrest the accrual of the interest, that the assessee had the right to recover the accumulated interest on the amount ultimately awarded, and that 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 under Section 5(1)(b) of the Income-tax Act of 1961, when that Act commenced to operate. The High Court also pointed out that the omission by the assessee to include the interest which had so accrued to him in the returns 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.

9. In Commissioner of Income-tax v. Chunilal V. Mehta & Sons (P.) Ltd., : [1971]82ITR54(SC) . the Supreme Court, while dealing with the question whether the compensation payable for terminating a managing agency agreement in 1951 accrued in 1951 or whether it accrued in 1955 when the dispute as to the the quantum was ultimately settled by a decree of the court, had expressed the view that the assessee's right to get the compensation arose in April, 1951, though he actually received the amount in December, 1955, that the fact that the assessee had included the receipt in question in its profit and loss account in the year 1955 was a wholly immaterial circumstance, and that what was relevant was the method of accounting and not the entries. In Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax, : [1971]82ITR363(SC) the Supreme Court, while dealing with the assessee's right to claim a particular sum as a deduction either under Section 10(1) or under Section 10(2) of the Income-tax Act, 1922, had taken the view that whether the assessee is entitled to a particular deduction or not will have to depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. In Morvi Industries Ltd. v. Commissioner of Income-tax, : [1971]82ITR835(SC) the Supreme Court again reiterated the same view while construing the scope of Section 4(1)(b)(i) of the Income-tax Act, 1922, with reference to the claim made by an assessee who relinquished the managing agency commission payable to him and claimed it as a deduction under Section 10(2)(xv) of the Act. The Supreme Court expressed thus:

' 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 efface 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 the Clause (b) of that sub-section.'

In the light of the above decisions, the learned counsel for the assesseecontends that there is a statutory liability to pay compensation for theproperty acquired by the State on the date of acquisition, that if the payment is postponed either in part or in whole, awaiting the quantification ofthe actual amount of compensation, the liability to pay interest also arisesstatutorily, and that the conduct of the assessee in not showing in hisaccounts the interest as having accrued in the respective years is immaterial. The learned counsel for the assesse, relying on the finding of theTribunal in its additional statement of the case that the method of accounting adopted by the assessee was mercantile, seeks support from thedecision of the Supreme Court in Commissioner of Income-tax v. ChunilalV. Mehta & Sons P. Ltd., : [1971]82ITR54(SC) wherein the Supreme Court laid down that what was relevant to find out as to when the amount accrued was the method of accounting and not the actual entries.

10. The learned counsel for the revenue, however, contends: (1) that as the assessee's right to get interest will arise only if there is delay in payment of the compensation it cannot be treated as having accrued on the date of acquisition, and that even if the accrual is spread over the years between the date of acquisition till the date of payment, the revenue can have option of assessing interest either on the basis of accrual or on the basis of receipt as accrual is not the sole test of taxability, and (2) that the finding rendered by the Tribunal in the supplemental statement of the case that the mode of accounting adopted by the assessee was mercantile has no basis at all, and as such cannot be accepted, and that, therefore, the revenue can either adopt accrual basis or receipt basis for the purpose of computing the total income of the assessee under Section 13 of the Act.

11. In this case 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. Therefore, the accrual of interest has to be spread over the years between the date of acquisition till it was actually paid. We are not in a position to accept the contention of the revenue that even if the accrual has taken place earlier, the Income-tax Officer can proceed to assess the income on the basis of receipt notwithstanding the earlier accrual as he has an option to assess the income by way of interest either on the basis of accrual or on the basis of receipt, and that the decision of the Mysore High Court in Commissioner of Income-tax v. Sampangiramaiah, in so far as it proceeds that the accrual alone should be taken as the basis for assessment, cannot be taken as laying down the correct law. The statute, in our view, does not give such an option to the revenue, as is contended, to choose either the accrual basis or the receipt basis for assessing the income. When a statute brings to charge certain income, its intention is to enforce the charge at the earliest point of time. If the income has accrued earlier and the assessee treats it as taxable during the year of accrual, it is not open to the revenue to treat it as an income in the year of receipt in a case where the assessee follows the mercantile basis of accounts, If such an option is given, the same income becomes taxable twice, once on the basis of accrual and another on the basis of receipt. The Supreme Court has pointed out in Laxmipat Singhania v. Commissioner of Income-tax, : [1969]72ITR291(SC) that:

' It is a fundamental rule of the law of taxation that, unless otherwise expressly provided, income cannot be taxed twice. Again, it is not open to the Income-tax Officer, if income has accrued to the assessee, and is liableto be included in the total income of a particular year, to ignore the accrual and thereafter to tax it as income of another year on the basis of receipt.'

The learned counsel refers to the proviso to Section 13 of the Act, as enabling the Income-tax Officer to adopt actual receipt basis when he finds that it is only by adopting such basis, the income can properly be deduced, and the words of the proviso ' the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine' are relied on as empowering the Income-tax Officer to adopt the receipt basis if in his opinion the income could be properly deduced only in that manner. This argument of the learned counsel flows from his contention that there is no method of accounting regularly adopted in relation to those sources of income, though the assessee might have adopted the mercantile basis in relation to his business as such. But, we are not inclined to accept the contention of the revenue that to ascertain the method of accounting adopted by the assessee one has to necessarily cut up the various sources, profits and gains and find out the method adopted in relation to each source of income. Though the income in question has been treated and taxed as income from other sources, the Tribunal's finding that the assessee has adopted the mercantile basis as his method of accounting in relation to all sources of income is acceptable to us, and the Tribunal has based its finding on some concrete material and we are not inclined to differ from that finding. The assessee has declared its income from property in the assessment years 1955-56 and 1956-57, and the income so declared included income from property, business as also interest on securities on the basis of the books of account kept by the assessee. In the assessment orders in relation to the above two years under column 5 of the return the method of accounting adopted by the assessee has been left blank. But, in the earlier year 1954-55 and later years 1957-58 and 1958-59, the assessment orders show that the method of accounting adopted by the assessee is mercantile and the details of income given in those assessment orders show that the accrual has been taken as the basis for bringing in some of the items for assessment during these years, though those items of income assessed have not actually been received. It is also found that the assessee has not maintained separate accounts in respect of the income from the property or in respect of the sum of. Rs. 6,28,716 but has shown it as a capital receipt towards the value of the property as and when each instalment was received. It cannot, therefore, be said that the Tribunal's finding that the assessee had adopted mercantile basis as his method of accounting is not based on any evidence or that it is perverse. In view of the fact that we accept the finding of the Tribunal that the assessee adopted the mercantile basis as his method of accounting,the Income-tax Officer cannot seek to invoke the proviso to Section 13 and proceed to assess the income in question on receipt basis.

12. The learned counsel for the revenue points out the inconvenience and difficulty in bringing to tax the income in question on accrual basis and the possibility of the assessee escaping the liability to tax in some of the years when accrual is said to have taken place by virtue of the period of limitation prescribed under the Act. He, therefore, contends that the income in question should be treated as coming from an independent source in respect of which the assessee should be deemed to have adopted no particular method of accounting so as to enable the Income-tax Officer to adopt the receipt basis for the purpose of assessment. According to the revenue even if the assessee is taken to have adopted the mercantile basis, it cannot afford a proper and sufficient means of deducing the income in question during the years between the date of acquisition and the date of payment and, therefore, the Income-tax Officer can adopt his own basis, But, it is well settled that when an assessee has adopted the mercantile system of accounting and has been taxed on accrual basis on certain income it was not open to the revenue to turn round and tax him on cash basis in the year in which he has received the same income. The position is the same, even if it had escaped tax in the year of accrual. (Vide Commissioner of Income-tax v. Jug Sah Muni Lal Sah, : [1939]7ITR522(Patna) and Commissioner of Income-tax v. Shrimati Singari Bai, : [1945]13ITR224(All) . If an income is taxable and taxed on the ground of accrual or deemed accrual, it cannot again be taxed either in the same year or in a different year on the ground of receipt. Whether the assessee is to be assessed on accrual basis or on receipt basis would depend on the method of accounting regularly employed by him and it does not depend on the choice of the Income-tax Officer. If an income is assessable on accrual basis as the assessee had adopted mercantile basis of accounting, the fact that the income accrued has not been shown in the account books by the assessee will not make it taxable in a later year on receipt basis. We are, therefore, of the view that the whole of the sum of Rs. 50,592 and the whole of the sum of Rs. 78,124 cannot be taxed as income in the assessment years 1955-56 and 1956-57 on receipt basis and that the said income has to be spread over the respective years to the extent to which they should be deemed to have been accrued in those years. We have to, therefore, answer the reference against the revenue and in favour of the assessee. The assessee will be entitled to its costs. Counsel's fee Rs. 250.


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