Commissioner Of Income-Tax vs Mahalakshmi Sugar Mills Co. Ltd.
2000 Latest Caselaw 1197 Del

JUDGMENT

D.K. Jain, J.

1. At the instance of the Revenue, the Income-tax Appellate Tribunal. Delhi Bench "D" (for short "the 'Tribunal'"), has referred, under Section 256(1) of the Income-tax Act, 1961 (in short "the Act"), the following questions, arising out of its consolidated order in I. T. A. Nos. 5422 and 5289 of 1972-73, for our opinion :

"1. Whether, on the facts, and in the circumstances of the case, the Tribunal was right in deleting the addition of Rs. 1,75,709 (Rs. 1,47,109 + Rs. 5,600 + Rs. 25,000) maintained by the Appellate Assistant Commissioner for the assessment year 1967-68 ?"

2. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in entertaining the additional ground of the assessed before them in respect of Rs. 1,868 and Rs. 19,157 representing profit under Section 41(2) and capital gains respectively ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sums of Rs. 1,868 and Rs. 19,157 representing profit under Section 41(2) and capital gains, respectively, should be deleted from the assessment ?"

2. The two references arise out of cross appeals pertaining to the assessment year 1967-68 for which the relevant previous year ended on June 30, 1966. The assessed was carrying on the business of manufacture and sale of sugar. It had a factory for the manufacture of sugar in Hamira in the then State of Kapurthala, which was shifted to Iqbalpur (U. P.), pursuant to

the decision of the Central Government, contained in their letter dated April 30, 1954. The building and the structures at Hamira along with the land appurtenant thereto, were requisitioned by the Deputy Commissioner, Kapurthala, by his order dated November 24, 1954, under the PEPSU Requisitioning and Acquisition of Immovable Property Act, 1954 (for short the "1954 PEPSU Act"), and it was delivered to one Jagatjit Distillery and Allied Industries Ltd., for the purpose of enabling them to set up a sugar factory. Later on, the property was de-requisitioned piecemeal and its possession was delivered back to the assessed in February, 1959. For the interregnum period of over four years no rent had been paid to the assessed either by the Central Government or by the said Jagatjit Distillery and Allied Industries Ltd., and the assessed asked for arbitration under the 1954 PEPSU Act. In response the Government appointed the District Judge, Kapurthala, as the arbitrator to determine the compensation payable to the assessed. The assessed filed its claim amounting to Rs. 6,60,777.56, as compensation for user and occupation of its properties by the Government for the period from 1954 to 1959 ; removal of certain fittings and movable properties ; cost for clearing the property and re-occupation, etc. The arbitrator gave his award on June 7, 1962, awarding a compensation of Rs. 2,75,610 to the assessed. The amount of Rs. 2,75,610 was assessed as the assessed's income, for the assessment year 1963-64, on the ground that the assessed became entitled to the said amount when the award was made. On appeal, the Appellate Assistant Commissioner (in short "the AAC") held that the compensation was finally determined in 1965 and, therefore, could be considered for taxation only in the assessment year 1967-68. It is to be noted that on appeal by the Government against the arbitrator's award, the compensation was reduced by the High Court to Rs. 2,31,601 vide its judgment dated November 24, 1965. It is pertinent to note that during the pendency of the appeal before the High Court, on the assessed's furnishing security in terms of an interim order passed by the High Court, the assessed received the said amount on January 7, 1964, The amount of Rs. 2,31,601 finally determined by the High Court was accounted for by the assessed in its books of account for the period ending June 30, 1966.

3. In its return for the assessment year 1967-68, the assessed claimed that except for the two amounts, namely, Rs. 1,868 and Rs. 19,157, which could be brought to tax respectively under Section 41(2) of the Act and by way of capital gains, the balance amount being capital receipt, was exempt from tax. However, the Income-tax Officer thought otherwise. While framing the assessment for the relevant assessment year, he took the view that the entire amount of Rs. 2,31,681 had been awarded to the assessed as arrears of rent for the Hamira properties requisitioned by the Government for about four years.

4. The break-up of the compensation of the said amount, as given in the assessment order, was as under :

Rs.

(a) For  use and occupation of the building (or the period December, 1954 to February, 1959 1,47,109

(b) Reimbursement charges for vacation and reoccupation of the premises 3,600

(c) Compensation turn Sheesham  trees removed from  the premises by jagatjit Distillery and Allied industries Ltd. 9,000

(d) Compensation received for demolition and removal of part of the building 46,997

(e) Compensation for demolition of railway siding and removal 24,975 2,.31,681

5. He treated the entire amount as a revenue receipt and brought it to tax accordingly.

6. The assessed took the matter in appeal to the Appellate Assistant Commissioner (in short the "AAC"). The Appellate Assistant Commissioner took the view that the compensation paid for the use of the requisitioned premises and for vacation and reoccupation of the properties, amounting to Rs. 1,50,709, was liable to tax as revenue receipt. He also held that it had been rightly assessed in the assessment year in question as income had accrued, when the same was determined in terms of a judgment of the High Court dated November 24, 1965. As regards the compensation for demolition of building and removal of articles, the Appellate Assistant Commissioner held that in the absence of precise details, it was difficult to agree with the assessed that the entire compensation of Rs. 80,972 related to demolition of building and railway siding and was thus a capital receipt. He, however, estimated the profit under Section 41(2) of the Act at Rs. 25,000 in respect of the building, machinery, railway siding, fittings, etc., and thus, granted a relief of Rs. 55,972 to the assessed. Being aggrieved by the order of the Appellate Assistant Commissioner, both the assessed and the Revenue took the matter in further appeals to the Tribunal. The Tribunal categorised the amounts received by the assessed as follows :

(i) rent or periodical payment for user of the properties by the Government ; and

(ii) compensation for damage and inconvenience caused to the assessed as a result of the requisition,

7. The Tribunal took the view that the former was of revenue and the latter was of capital nature. It accordingly held that the amount of Rs. 1,47,109 falling in category (i) above was of revenue nature and, there-

fore, assessable to tax. As regards the sum of Rs. 80,972 (Rs. 9,000 + Rs. 46,997 + Rs. 24,975) relating to compensation for demolition of building and removal of various articles, considered under category (ii) above, the Tribunal was of the view that since in respect of some of the items depreciation had been granted to the assessed in the earlier years, out of the said amount the amounts of Rs. 46,997 and Rs. 24,975 were assessable under Section 41(2) of the Act. However, in view of its decision on the question of year of accrual of income, the Tribunal did not go deeper into this aspect. It merely referred to the admission of the assessed before the Income-tax Officer about the taxability of profit of Rs. 1,868 under Section 41(2) of the Act and a capital gain of Rs. 19,157, which was estimated by the Appellate Assistant Commissioner at Rs. 25,000.

8. Regarding the year of accrual of the income, the Tribunal observed that in the assessed's appeal pertaining to the assessment year 1963-64, it had decided that (a) the right to compensation accrued in December, 1954, relevant to the assessment year 1956-57 ; (b) that even on the basis of award, the accrual will be in the assessment year 1964-65 and not 1963-64 ; and (c) that there was no accrual in the assessment year 1967-68. The Tribunal also observed that while coming to the said conclusion it had taken note of the assessed's argument that taxability of any part of the receipt, if at all, could be considered only in the assessment year 1967-68. The Tribunal accordingly held that since the question of assessability of the amount of compensation in the assessment year 1967-68 had already been considered in its earlier order, it was not necessary to reconsider the issue afresh. Thus, it was held that no part of the compensation accrued or arose in the year in question, viz., assessment year 1967-68. Accordingly, the Tribunal deleted the addition of Rs. 1,75,709, sustained by the Appellate Assistant Commissioner. The Tribunal also rejected the plea of the Revenue that the assessed having itself declared in its return Rs. 1,868 and Rs. 19,157 as profit under Section 41(2) and capital gains, respectively, it should not be permitted now to urge as an additional ground before the Tribunal that the amounts are not assessable to tax. Observing that the assessability of the entire amount of compensation was the issue all along, and the same being a question of law, the Tribunal permitted the assessed to raise the said ground. The Tribunal finally deleted the said two amounts also from the assessment for the relevant assessment year on the ground that no part of the income had accrued in this year.

9. As noticed above, on the motion of the Revenue, the aforenoted questions have been referred for our opinion.

10. We have heard Mr. R. D. Jolly, learned counsel for the Revenue, and Mr. S. N. Kumar, learned counsel for the assessed at considerable length.

11. It is submitted by Mr. Jolly that the amount of compensation in question is taxable in the assessment year 1967-68 because : (i) the right to

receive compensation got finally adjudicated only when the High Court delivered its judgment on November 24, 1965 ; (ii) having argued in its appeal for the assessment year 1963-64 that the amounts were assessable in the assessment year 1967-68, it is not open to the assessed to now urge that these are not assessable in this year ; and (iii) even the assessed had accounted for these amounts in its books of account for the assessment year in question. In support of the first proposition, reliance is placed on a decision of the Supreme Court in CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524. On the other hand, Mr. Kumar has contended that the right to receive compensation must be deemed to have accrued under Section 8 of the 1954 PEPSU Act immediately on the requisition of the assessed's properties in the year 1954 and, therefore, it was assessable to tax from year to year on accrual basis and not in the year when the High Court had rendered its verdict.

12. Thus, the main question for consideration is as to in which assessment year the assessed is liable to be assessed in respect of the amount of compensation received by it. Before we take up the issue, we deem it necessary to take note of the decision of this court in the assessed's reference in respect of the assessment year 1963-64. The decision is reported as Mahalaxmi Sugar Mills Co. Ltd. v. CIT [1986] 157 ITR 683 (Delhi). Therein it was, inter alia, observed that : (i) the Tribunal had failed to examine the question in the light of Section 8 of the 1954 PEPSU Act, which showed that a recurring payment, equal to the amount of rent, was to be made after the requisitioned property had been taken on lease for the period of requisition ; (ii) the Tribunal did not examine as to whether the income could also be said to have accrued only after it was quantified and if that was so then it could be said to have accrued only after January 7, 1964 (beyond assessment year 1963-64), when the assessed received payment under interim orders of the High Court ; (iii) the Tribunal may not be right when it reached the conclusion that the compensation accrued to the assessed in the assessment year 1965-66 ; and (iv) in the instant case, a liability to pay compensation on the part of the Government and correspondingly of the assessed to receive, had accrued immediately on taking over the possession of the requisitioned property. The court finally answered the question, namely, as to whether any part of compensation of Rs. 2,75,610 was assessable in the assessment year 1963-64 as follows (page 696):

"We cannot accept the argument advanced on behalf of the Department that a right accrued in favor of the assessed to receive compensation on the making of the award and if the compensation or part thereof represented income, such income accrued on June 7, 1962, and that the pendency of the appeal against the award did not postpone the right and, consequently, the accrual. This may be so in a case where the property is acquired when the amount of compensation is quantified and not in a

case where the property is requisitioned, as in the instant case. The compensation was also assessed in the assessment year 1967-68 and the appeal before the Tribunal was pending in respect of the assessment year 1967-68, when the present reference arose. We do not know the fate of that appeal. Thus, it would appear to us that the amount of compensation awarded is certainly not assessable in the assessment year 1963-64, and, therefore, we restrict our answer to the question referred to us and would not say in which particular year this amount has to be assessed."

13. The aforenoted observations and the final opinion recorded in that case would show that the question was considered by the court primarily on the basis of Section 8(2) of the 1954 PEPSU Act, which undoubtedly provides that the amount of compensation payable for use and occupation of the requisitioned property is a recurring payment in respect of the period of requisition. Evidently, while holding that pendency of appeal against the award did not postpone the right and consequently the accrual, the court did not go deeper into the question as to whether in its appeal the State had challenged its very liability to pay compensation or only the quantum of compensation awarded or both. We feel that this is a vital aspect which would have an important bearing on the answer to the question as to when the income by way of compensation can be said to have been received or accrued or arisen to the assessed in terms of Section 5 of the Act. Total income, according to Section 5, dealing with its scope, includes all income from whatever source derived which is "received" or which "accrues" or "arises" or when by fiction it is deemed to accrue, arise, or is deemed to be received. Under the section, the charge is on receipt or accrual basis. The expressions "is received", "accrues", or "arises" as appearing in the said section, are three distinct terms but are not defined.

14. In CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42, the Supreme Court observed that the words "accrue" and "arise" are used to contradistinguish the word "receive". Income is said to be received when it actually reaches the assessed's hands, but short of receipt, when the right to receive the income becomes vested in the assessed, it is said to accrue or arise. Therefore, mere receipt of income is not the only test of chargeability to tax (see Keshav Mills Ltd. v. CIT . If income accrues or arises, it may become liable to tax. It is, therefore, manifest that if an assessed acquires a right to receive income, the income can be said to accrue to him, though it may be received later on.

15. The question as to the point at which income could be said to "accrue" or "arise" to an assessed for the purpose of the Indian Income-tax Act, 1922, came up for consideration in E. D. Sassoon and Co. Ltd. v. CIT . In the majority judgment it was explained that the words "arising" or "accruing" described a right to receive profits and that there must be a debt owed by somebody. It was observed that it cannot be said

that an assessed has acquired a right to receive the income or that income has accrued to him unless and until there is created in favor of the asses-see a debt due by somebody.

16. On the connotation of the word "debt", in Kesoram Industries and Cotton Mills Ltd. v. CWT[1966] 59 ITR 767, the apex court observed as follows (page 784) :

"A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in future ; debitum in prae-senti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened."

17. Thus a mere claim to income without an enforceable right thereto cannot be regarded as accrued income for the purpose of the Act. The question of accrual of income to the assessed in a particular year on compulsory acquisition of land was considered by the apex court in Hindustan Housing and land Development Trust Ltd.'s case [1986] 161 ITR 524. In that case certain lands belonging to the assessed-company were first requisitioned and then compulsorily acquired by the State Government, On an appeal preferred by the assessed-company, the arbitrator made an award directing compensation to be paid for requisition and acquisition. The arbitrator's award was challenged by the State Government before the High Court. Pending the appeal, the State Government deposited the amount in the court which the assessed-company was permitted to withdraw on furnishing a security bond for refunding the amount in the event of the appeal preferred by the State Government being decided in its favor. It was found by the Tribunal that the entire amount was in dispute in the appeal filed by the State Government ; that the dispute was "real and substantial" ; and that the assessed was permitted to withdraw the amount deposited by the State Government, subject to furnishing a security bond for refunding the amount in the event of the appeal being allowed. On these facts, the Supreme Court found that there was no absolute right to receive the enhanced amount at that stage and if the appeal was allowed in its entirety, the right to payment of the enhanced compensation would have fallen altogether. Reiterating the principles laid down in E. D. Sassoon and Co. Ltd.'s case [1954] 26 ITR 27 the apex court held that unless and until there is a debt created in favor of an assessed, due by somebody, it cannot be said that he has acquired a right to receive the income. Thus, in the said case, the apex court has drawn a clear distinction between the cases where the right to receive payment itself was in dispute and it was not a question of merely quantifying the amount to be received and the cases where the right to receive the payment was admitted and only the quantification of the amount payable was left to be determined in accordance with the settled or accepted principles. In other words, in the former case, when the right to receive compensation is in

dispute, there is no "debt" created in favor of the assessed while in the latter case, when the right to receive is admitted, a debt is created immediately on requisition or acquisition as the case may be.

18. In the light of the aforenoted principle of law laid down in Hindustan Housing and Land Development Trust Ltd.'s case [1986] 161 ITR 524 as we have observed above, what has to be examined in the present case is as to whether it was the right of the assessed to receive the amount of compensation which was in dispute in the State Government's appeal. If it was so, it cannot be said that he had acquired a right to receive the income or that income had accrued to it, and the amount held to be a revenue receipt by the Tribunal will be taxable in the assessment year 1967-68. On the contrary, if the appeal was only on the question of mere quantification of the amount to be received by the assessed the income had accrued in terms of Section 8(2) of the 1954 PEPSU Act. We notice that although, in the statement of case there is no clear indication in this behalf, but in its order pertaining to the assessment year 1963-64, forming part of the paper book, the Tribunal has recorded the contention of counsel for the assessed that the appeal of the State included "the outright denial of any liability to pay compensation at all to the assessed". As the appeal memo, filed by the State, is not before us we have no means to Verify the correctness or otherwise of the said averment of counsel. In the absence of this vital information we find it difficult to answer the question formulated by us above in the correct perspective. Under the circumstances we feel that the best course would be to remit the matter back to the Tribunal to consider the aforenoted issue afresh in the light of the principle of law laid down by the apex court in Hindustan Housing and Land Development Trust Ltd.'s case [1986] 161 ITR 524 and our observations made above. Since we are remitting the matter back to the Tribunal on the main issue, we do not deem it necessary to answer the other two questions referred by the Tribunal.

19. The references are answered accordingly. No costs.