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Commissioner of Income-tax Vs. Naskarpara Jute Mills Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 170 of 1978
Judge
Reported in(1982)28CTR(Cal)365,[1983]141ITR384(Cal)
ActsCode of Civil Procedure (CPC) , 1908 - Section 34
AppellantCommissioner of Income-tax
RespondentNaskarpara Jute Mills Co. Ltd.
Appellant AdvocateS.K. Mitra and ;S.K. Chakraborty, Advs.
Respondent AdvocateNone
Cases ReferredShivaprasad Singh v. Prayagkumari Debee
Excerpt:
- .....of the said act should be looked into to determine the question whether in the particular year income had arisen or accrued to a particular assessee. it was further urged that this position should be analysed or determined from the provisions of the i.t. act uncontrolled by the provisions or requirements of any other law or act. in aid of this proposition that the i.t. act is an exhaustive one, reliance was placed on the observations of the judicial committee in the case of cit v. tribune trust, [1948] 16 itr 214 and our attention was drawn to the observations of the judicial committee at p. 224. similarly, reliance was placed, for the same proposition, on the decision of the supreme court in the case of rao bahadur ravulu subba rao v. cit, : [1956]30itr163(sc) . the proposition.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following questions have been referred to this court :

' (i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the right to receive further interest from the date of the suit accrues to the assessee only when the court passes decree

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the matter of assessment of interest cannot be decided unless the result of the suit already filed is known

(iii) Whether, on the facts and in the circumstances of the case, and particularly in view of the fact that the debtor-company in its written statement has admitted the liability with regard to the quantum of loan advanced and the rate of interest, the Tribunal was justified in sending the matter back to the Appellate Assistant Commissioner to decide the issue afresh after the result of the suit is known ?'

2. This reference relates to the assessment years 1971-72 and 1972-73 for which the corresponding accounting years ended on 31st October, 1970, and 31st October, 1971. The assessee is a company carrying on the business of manufacture of jute. The dispute which the Tribunal was called upon to decide for these two years related to the inclusion, by the authorities, of the sums of Rs. 4,99,984 in the assessment year 1971-72 and Rs. 5,28,762 in the assessment year 1972-73. It appears that the assessee had been advancing moneys, from time to time, to another jute company, known as M/s. Chandpur Jute Co. Ltd., during the period between 1951 and 1961. The advances were interest bearing. By the end of April, 1961, after giving credit for the amounts repaid by the debtor-company, a sum of Rs. 57,59,532 was found to be the balance of principal still outstanding. On 6th October, 1961, the assessee-company filed a suit, being Suit No. 1772 of 1961, to recover the debt from the debtor-company of the aforesaid sum of Rs. 57,59,532 and also a further sum of Rs. 1,13,771 being interest on the said sum for the period from May 1, 1961, to September 4, 1962, at the rate of 5 3/4 per cent. per annum together with interim interest and further interest from the date of decree till the date of realisation and costs of the suit. The debtor-company filed their written statement admitting the liability to pay the amount of Rs. 58,73,304 as the aggregate sum of Rs. 57,59,532 and Rs. 1,13,771, being the interest from 6th October, 1961, to the date prior to the filing of the suit. The debtor-company, however, disputed or pleaded that in August, 1961, there was an agreement between the assessee and the said debtor-company as a result of which the amount would not be payable to the assessee-company by the said debtor-company before 31st December, 1967. It was, therefore,pleaded that the suit was premature and was not maintainable. At the time of the assessment proceedings, the assessee contended that the awarding of interest for the period subsequent to the filing of the suit was a matter of discretion of the court and there was no interest on the loan due by the debtor-company and, as such, the assessee could not be taxed on the interest on accrual basis for the year under consideration. The ITO rejected this contention and included, for the assessment year 1971-72, a sum of Rs. 4,99,984 and for the assessment year 1972-73, a sum of Rs. 5,28,760 as accrued interest. On appeal, the AAC confirmed the order of the ITO.

3. Being aggrieved by the said orders of the AAC, the assessee went up in appeal before the Tribunal. The Tribunal was of the opinion that in view of the stand taken by the debtor-company in its written statement, the point in issue could not be determined unless the result of the suit was known. If the suit was decreed for the said amount and also further interest from the date of the plaint till the date of the decree, as such, at such rate as was specified in the decree, the entire interest from the date of the suit till the date of the decree at such rate would only be assessed to tax in the year in which the decree was passed. The Tribunal held that the interest from the date of the suit could not be assessed to tax each year on the basis that the interest had continued to accrue from year to year at the contracted rate. If the suit was ultimately dismissed on the ground that it was premature, according to the Tribunal, then the position would be different. It would be desirable to put the observations in the words of the Tribunal. The Tribunal observed as follows:

' It is no doubt a well-established proposition that the interest accrues from year to year and in a case where an assessee adopts the mercantile system of accounting the interest accruing to the assessee each year has to be computed at the contract rate and assessed to tax in the relevant assessment year on accrual basis. But this principle is subject to one qualification. Where an assessee files a civil suit against his debtor for recovery of the debt, the further interest from the date of the suit cannot be assessed to tax on accrual basis, computing the same at the contract rate. In a suit for recovery of a debt he can ask for a decree for the principal amount and the interest accruing, as per the contract rate, up to the date of the suit and he can also ask for further interest from the date of the suit. Even if the court passes a decree for the principal amount and the interest accruing up to the date of the suit at the contract rate, it may not grant further interest from the date of the suit at the contract rate. Under Section 34 of the Code of Civil Procedure, the awarding of further interest from the date of the suit up to the date of the decree and the rate of such further interest are matters within the discretion of the court passingthe decree. At the time of the filing of the suit for recovery of the debt the plaintiff has merely the right to claim further interest from the date of the suit up to the date of the decree. But the right to receive such further interest from the date of the suit up to the date of the decree at such rate as is determined by the court accrues to the plaintiff only when the court passes the decree awarding the plaintiff further interest from the date of the suit at such rate as is determined by it. The right of a plaintiff to a suit to receive interest from the date of the suit till the date of the decree, as awarded by the court under Section 34 of the Code of Civil Procedure, is analogous to the right of a person whose land has been acquired by the Government under the Land Acquisition Act to the interest on the enhanced compensation awarded by the civil court under Section 28 of the Land Acquisition Act. '

4. The Tribunal thereafter referred to certain decisions regarding the land acquisition payment and interest on the land acquisition cases. On the aforesaid decision of the Tribunal, three questions indicated hereinbefore have been referred to this court.

5. On behalf of the Revenue it was contended before us that the I.T. Act was exhaustive by itself and the provisions of the said Act should be looked into to determine the question whether in the particular year income had arisen or accrued to a particular assessee. It was further urged that this position should be analysed or determined from the provisions of the I.T. Act uncontrolled by the provisions or requirements of any other law or Act. In aid of this proposition that the I.T. Act is an exhaustive one, reliance was placed on the observations of the Judicial Committee in the case of CIT v. Tribune Trust, [1948] 16 ITR 214 and our attention was drawn to the observations of the Judicial Committee at p. 224. Similarly, reliance was placed, for the same proposition, on the decision of the Supreme Court in the case of Rao Bahadur Ravulu Subba Rao v. CIT, : [1956]30ITR163(SC) . The proposition that for the matters contained in the Act, the I.T. Act, is an exhaustive one, cannot, in our opinion, be disputed. Therefore, it is not necessary for us to refer to those decisions in detail.

6. Our attention was also drawn to several provisions of the I.T. Act itself to highlight the question that whether an income arises or accrues in a particular year and the manner how an income arises or accrues are provided for in the provisions of the I.T. Act. Our attention was also drawn to Section 2(45), Section 5(1)(b) and about the scope and effect of the method of accounting. Our attention was also drawn to Section 145 of the I.T. Act, 1961. Learned advocate for the Revenue also drew our attention to the observations in the case of CIT v. Chunilal V. Mehta & Sons P. Ltd, : [1971]82ITR54(SC) , where the Supreme Court highlighted that what wasimportant in determining these matters was the method of accounting followed by the assessee and not a particular entry made on a particular date. Similarly, learned advocate for the Revenue contended that income under the I.T. law becomes assessable when it arises or accrues to the assessee and if the mercantile system of accounting is followed and an accrual is made in a particular year then that income should be included in the particular year. There is no dispute that in the instant case the assessee was following the mercantile system of accounting. Reliance was placed, in this connection, on the observations of the House of Lords in the case of IRC v. Gardner Mountain & D'Ambrumenil Ltd., [1947] 29 TC 69, and the learned advocate for the Revenue drew our attention to the observation of Lord Wright at p. 96 of the report where his Lordship emphasised that in a mercantile system of accounting, on accrual a vested right was created. Similarly, reliance was placed on the observations of Lord Simonds at p. 110 of the report. Our attention was also drawn to the decisions in the case of CIT v. Shri Goverdhan Ltd., : [1968]69ITR675(SC) and in the case of Kesoram Industries and Cotton Mills Ltd. v. CWT, : [1966]59ITR767(SC) , and also in the case of CIT v. Eastern Spinning Mills Ltd., : [1980]126ITR686(Cal) , for the proposition that income accrued in the year when under the terms of the contract that income became due and payable. These propositions advanced on behalf of the Revenue cannot be disputed.

7. It has, however, to be borne in mind that if by the terms of the contract, where the terms of the contract operate, the income accrues in the year in which, by the terms of the contract, the income becomes due or payable then such an income which has accrued by the terms of the contract in such cases would be entitled to be included in the income of the assessee. But neither proposition that the I.T. Act is exhaustive by itself, nor that in the scheme of the I.T. Act, there is a provision as to when income is deemed to arise or accrue, takes away the application of the ordinary principles of law. According to these principles, income must accrue in accordance with the law. In a suit, where a suit is filed, income accrues by the terms of the decree by the express provision of Section 34 of the CPC, after the suit is instituted ; a discretion is given to the court to pass an order for interest either from the date of the suit to the date of decree, and (it) is not (so much) a matter of accrual as a matter of right, on the terms of the contract until the decree is passed or the suit is dismissed. The Tribunal has proceeded on this major assumption and which, in our opinion, is a correct assumption of law. The material portion of Section 34 of the CPC provides as follows :

'34. (1) Where and in so far as a decree is for the payment of money, the Court may, in the decree, order interest at such rate as theCourt deems reasonable to be paid on the principal sum adjudged, from the date of the suit to the date of decree in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further interest at such rate not exceeding six per cent. per annum as the Court deems reasonable on such principal sum, from the date of the decree to the date of payment, or to such earlier date as the Court thinks fit:

Provided that where the liability in relation to the sum so adjudged had arisen out of a commercial transaction, the rate of such further interest may exceed six per cent. per annum, but shall not exceed the contractual rate of interest or where there is no contractual rate, the rate at which moneys are lent or advanced by nationalised banks in relation to commercial transactions...'

(2) Where such a decree is silent with respect to the payment of further interest on such principal sum from the date of the decree to the date of payment or other earlier date, the court shall be deemed to have refused such interest, and a separate suit therefor shall not lie. '

8. Learned advocate for the Revenue, however, drew our attention to the observations in the case of Dinesh Chandra Saha & Co. v. Safer Ali Mandal, AIR 1920 Cal 881, where the Division Bench of this High Court held that the mere finding that the rate of interest in a mortgage bond was excessive was not sufficient reason for refusing the plaintiff interest at the rate of the contract. This is the principle, undoubtedly, which the court adjudicating the suit, will have to bear in mind. But the learned advocate for the Revenue sought to urge that simply because there was a provision for payment of interest at a particular rate in this case, and further because that provision is not disputed in the written statement, the liability for payment--the liability to pay is denied--does not affect the proposition that after the institution of the suit interest for the post-institution period is in the discretion of the court. Reliance in this connection was placed on the observations of the Division Bench of this court in the case of Shivaprasad Singh v. Prayagkumari Debee, AIR 1935 Cal 39, for the same proposition. Learned advocate for the Revenue also drew our attention to the observations of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT : [1959]37ITR1(SC) on the question of accrued liability. These observations, in our opinion, have no relevance in the context of Section 34 with respect to post-institution period interest. Reliance was also placed on the question when does interest accrue, on the decisions in the case of CIT v. Dr. Sham Lal Narula, , in the case of Joyanarayan Panigrahi v. CIT : [1974]93ITR102(Orissa) and in the case of Addl. CIT v. Glass Miniature Bulb Industries, : [1981]130ITR41(All) . As we have mentioned before, there is no dispute as tothe proposition that income normally accrues or arises out of the terms of the bargain between the parties. There is no dispute that for an assessee following the mercantile system of accounting, as in this case, income to be included must accrue in the year of account. But these propositions are subject to, the fulfilment of the major requirement of the law of the land, that is to say, Section 34 of the CPC, which enjoins that for the post-institution period when a suit is pending it is in the discretion of the court. This proposition does not militate or detract from the I.T. Act, 1961; in fact it is in consonance with the same.

9. The second aspect upon which reliance was placed was the aspect that the Tribunal had not decided the question before them for the years in question. The Tribunal has, according to learned advocate for the Revenue, decided the question in vacuum and it was contended that the Tribunal must find the fact and apply the law in the particular aspect and not decide the question in a vacuum. In aid of this proposition reliance was placed on the decisions in the case of ITO v. Murlidhar Bhagwan Das : [1964]52ITR335(SC) , and in the case of Rajinder Nath v. CIT, : [1979]120ITR14(SC) . It is true that this proposition cannot be disputed. But in this case the Tribunal has not, in our opinion, decided any question in vacuum. The Tribunal has borne the facts of the years in question in mind. The Tribunal has noted that the 'suit has not yet been decided '. The Tribunal has, therefore, directed that the appeal should be restored to the file of the AAC and decided after disposal of the suit in the manner indicated by the Tribunal. Such a direction, in our opinion, is not beyond the jurisdiction of the Tribunal. We should rather think that it was a desirable direction that the Tribunal could give.

10. In that view of the matter, we answer question No. (i) in the affirmative and in favour of the assessee. We answer question No. (ii) also in the affirmative and in favour of the assessee. We would also answer question No. (iii) in the affirmative and in favour of the assessee.

11. In the facts and circumstances of the case, as the assessee is not appearing, the parties will pay and bear their own costs.

Sudhindra Mohan Gupta, J.

12. I agree.


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