Ajit K. Sengupta, J. - In this reference under s. 256(1) of the IT Act, 1961 the Tribunal has referred the following question of law for the opinion of this Court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest income of Rs. 21,912 in respect of money lying with the Receiver appointed by the Honble High Court and invested by him could not be included in the assessees total in come liable for assessment in the asst. yr. 1971-72 ?'
2. The facts leading to this reference are stated hereinafter as follows : The assessee is a limited company. For the asst. yr. 1971-72 the assessee claimed before the ITO that accrued interest of Rs. 21,912 on the amount lying with the Receiver and invested by him was not liable to assessment. The ITO following his earlier order did not accept the claim of the assessee and included the accrued interest of Rs. 21,912 in the total income of the assessee company. The assessee preferred an appeal before the AAC.
3. The AAC held that the sum of Rs. 21,912, being the amount of interest income, in respect of the money received as Receivers appointed by the High Court could not be included in the total income of the assessee. He has taken into consideration the fact that the assessee is the owner of the house property at No. 24, Park Street, Calcutta. Pending eviction of certain tenants at 24, Park-Street, Calcutta, the rent payable by them was received by the Receivers appointed by this High Court. The Receivers advanced the deposited rent as loans to others. For the assessment year in question in regard to the interest credited by the Receivers to the account of the assessee, the AAC followed the earlier orders in the case of the assessee. The vice taken by the AAC was that until and unless the suits were disposed by the High Court, the assessee was entitled to any money or interest and the interest could not be charged on something imaginary. The AAC however, gave liberty to the department to tax the amount as and when be entitled to the interest accrued on the investments made by the Receivers. The moneys were not standing in the assessees books and thus the mercantile system of accounting was not at all relevant for the purpose of determining the issue.
4. The department preferred an appeal before the Tribunal. The Tribunal followed its earlier order and upheld the order of the AAC. The Tribunal held as follows :
'After the purchase of the property the assessee instituted suits for eviction against five of the tenants. These tenants had been depositing rents with the Rent Controller. In the suits the tenants disputed their liabilities to eviction. At the instance of the assessee the High Court appointed Receiver from time to time for the realisation of the amounts of rents deposited with the rent controller and also rents later on. The Receivers were given all the power under Order 40, r. 1 of the Code of Civil Procedure. While appointing the Receivers the High Court did not decide as to whom the amounts to be received by the Receivers would belong. The decision of the question of ownership rested with the Court. Rule 1 of order 40 empowers a Receiver for collection of rents and profits and the application and disposal of such rents and profits. This does not specifically give any power to a Receiver to advance the amounts received by him as loan on interest. We, therefore, agree with the AAC, that the investments of amounts had been unauthorised and the assessee cannot be held responsible for the same. Even assuming that the Receivers had the authority to invest the amount on interest the assessee did not acquire any ownership of the amounts recovered by the Receivers was determined by the High Court during the pendency of the suits. The interest, therefore, cannot be included in the income of the assessee in all the years under consideration.'
5. On these facts, the question set out above has been referred to this Court.
6. Mr. Ram Chandra Prosad, ld. Advocate appearing for the Revenue, has submitted that inasmuch as the assessee was following mercantile system of accounting, this income ought to have been included in the hands of the assessee and the Tribunal erred in law in not holding that the income should be assessed in the hands of the assessee.
7. Mr. Sh. Bagaria ld. advocate for the assessee has submitted that the Tribunal has considered all the facts and circumstances of this case and the finding of the Tribunal that the investment made by the Receivers was unauthorised and the assessee could not be held responsible for the same has not been challenged in this proceeding. On the facts found by the Tribunal the question must be answered in favour of the assessee. He has also submitted that as it appears the earlier orders of the Tribunal have not been challenged.
8. We have considered the rival submission. It is true that the assessee is the owner of the property. The suit was filed in the High Court by the assessee for eviction of some tenants. The assessee, no doubt, is the owner of the rental income. The Receivers were appointed by the High Court to collect the rents deposited with the Rent Controller as well as the further amounts if payable by the tenants. But the Receivers, who collected the rents, were not authorised to make investments of the rents realised by them by way of loan to others. The Receivers were liable to account for the interest which had been earned unauthorised investments made by them. As a matter of fact the interest received by the Receivers on the investments made by them, although unauthorisedly, have been shows in the Receivers accounts. The accrual or arising of income is generally dependant on the method of accounting employed by the assessee. But here the method of accounting of the assessee has no relevance at all. The question is whether any income has accrued to the assessee by reason of the unauthorised investments made by the Receivers of the rents realised by them. Where no income has resulted, it cannot be said that the income has accrued merely on the ground that the assessee had been following the merchantile system of accounting. Hypothetical income cannot be taxed. Only when income has materialised it will be liable to tax. A judgment or decree of a Court does not normally create a right in an assessee and only a pre-existing right is declared by the judgment or decree. The assessee is entitled to receive the arrears of rents realised by the Receivers as well as the amounts paid by the tenants during the pendency of the suits for eviction. Unless specifically directed by the High Court, the Receivers could not have invested the amounts realised by them by giving loans to others. Thus the right of the assessee to have any part of the interest on the unauthorised investments made by the Receivers has to be decided by the High Court. It cannot be said that the right to receive the interest income vested in the assessee. If the assessee acquires a right to receive the income, only then income can be said to have accrued to him. On the facts and in the circumstances of the case, it cannot be said that the assessee had any right to receive any part of the interest income earned by the Joint Receivers by their unauthorised act of investments. The interest income was earned by the Joint Receivers on the investments made by them and they were liable to tax on such income subject to the determination which might have been made by the High Court in the pending proceedings. In this case, there is neither any physical receipt nor any receipt in law by the assessee. In the premises aforesaid, we are of the view that the Tribunal has come to the correct conclusion.
9. In the result, the question referred to us is answered in the affirmative and in favour to us is answered in the affirmative and in favour of the assessee.
10. There will be no order as to cost.
R. N. Pyne, J. - I agree.