Delhi High Court

Pal Properties (I)(P) Ltd. vs Ito on 5 September, 2000

Equivalent citations: 2001 79 ITD 464 Delhi

ORDER

Per R.S. Syal, A.M.

These two appeals by the assessee emanate from the combined order passed by the Commissioner (Appeals) on 21-5-1993 relevant to assessment years 1990-91 and 1991-92.

2. Since both the appeals are based on common facts and identical grounds of appeal, we, therefore, proceed to dispose of them by way of this consolidated order for the sake of convenience.

3. The appeal for assessment year 1990-91 and the first ground for assessment year 1991-92 rotate around a single issue. Briefly stated the facts of the case on the issue are : The assessee entered into lease agreement on 26-11-1979 with M/s. Arya Dharam Seva Sangh, for the lease of the 1st Floor, premises, Flat No. H-72, Connaught Circus, New Delhi together with right of entrance passage and other casements of the said premises for 114 months at a rent of Rs. 1,000 per month. This lease deed was renewable at the desire of the tenant. The assessee entered into sub-lease vide lease deed dated 18-8-1981 with the Traders Bank. The Traders Bank regularly paid the rent till 1988 at the rate of Rs. 24,201.75 P. On nationalisation the Bank of Baroda took over the possession of the premises from Traders Bank. On 15-6-1989 this sublease expired.

Since the Bank of Baroda after taking over from Traders Bank failed to pay the rent to the assessee, the assessee vide its letter dated 11-1-1989 terminated the tenancy agreement with effect from 31-1-1989 on the ground of non-payment of rent. After 11-1-1989 the assessee received a letter from the bank dated 6-1-1989 along with a cheque dated 19-12-1988 for Rs. 96,807 representing the rent for the months of July to October, 1988. The assessee vide its letter dated 13-1-1989 returned the cheque clarifying that the tenancy was terminated vide its letter dated 11-1-1989. Though the assessee terminated the tenancy agreement and returned some of the cheques received towards rent, rental income was shown in the return of income for the assessment year 1989-90 and for three months i.e. from 1-4-1989 to 30-6-1989 in its return of income for the assessment year 1990-91. The assessing officer while framing assessment for the assessment year 1990-91 under section 143(3) called upon the assessee to explain as to why the rent for the period after 30-6-1989 was not offered for taxation. It was explained on behalf of the assessee that the tenancy was valid till 30-6-1989 and thereafter the assessee was not entitled to receive rent. It was also explained that the assessee had filed legal suit against the bank for vacation of the premises. As the right to receive the rent was in dispute, it was submitted on behalf of the assessee that the same could not be brought to tax. Before the assessing officer the assessee placed relied on the decision of the Apex Court in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. (1986) 161 ITR 524. The assessing officer deputed the inspector who reported that the bank was regularly paying rent to the assessee-company. The assessing officer thereafter included in the total income the rent for 12 months at the rate of Rs. 24,201.75P. per month instead of three months as shown by the assessee for the assessment year 1990-91, and for 12 months for the assessment year 1991-92. The decision of the assessing officer was confirmed by the learned Commissioner (Appeals) for both the assessment years.

3.1 Shri M.S. Syali, the learned counsel for the assessee vehemently urged that the revenue authorities had erred in including the rent for 9 months and 12 months respectively in assessee's income for assessment years 1990-91 and 1991-92 respectively. It was submitted by the learned counsel that the assessee was following cash method of accounting in respect of the rent received. He further pointed out that both the revenue authorities had failed in appreciating the adoption of this method of accounting and had wrongly mentioned that the books of account were maintained by the assessee on the basis of mercantile system of accounting. He pointed out that the rental income in the earlier years was not assessed under the head 'Income from house property' because of the fact that the assessee was not the owner of the said property. It was pointed out by him that the income recorded in earlier years was also assessed accordingly. He pointed out that when the bank failed to pay the rent in accordance with the terms of the lease deed, a suit for possession and recovery was filed before the Hon'ble Delhi High Court claiming compensation therein as under :

(a) Rent for the period July, 1988 to May, 1989 i.e., for 11 months at the rate of Rs. 24,201.75P. totalling Rs. 2,66,219.25P.

(b) Compensation for the period 1-6-1989 to 31-7-1991 i.e., 26 months at the rate of Rs. 70,000 per month as the market value of the premises on 1-6-1989 was approximately Rs. 70,000 per month and since then it had further gone up, totalling Rs. 18,20,000.

Referring to paragraph 18 of the suit filed before the High Court, the learned counsel pleaded that the assessee's total claim of Rs. 2,66,219.25P. was towards the rent received from July, 1988 to May, 1989 and of Rs. 18,20,000 was towards compensation from 1-6-1989 to 31-7-199 1. The learned counsel explained that the lease deed entered into with the bank was for a specified period and had expired in May, 1989 and there was no provision contained in the deed for its further renewal the choice of the bank. He, therefore, pleaded that even if it was presumed for the sake of argument that the assessee was maintaining its accounts on mercantile system of accounting, the assessee had no right to record the rent from the bank after the expiry of the said lease deed. Placing reliance on the judgment of the Apex Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) it was explained by him that there was a distinction between cases where the right to receive payment 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 payment was admitted and the quantification of the amount payable was then to be determined. He pleaded that the assessee had no right to receive payment and thus the rent was not taxable. He also relied on the decisions of the Apex Court in the cases of P. Mariappa Gounder v. CIT (1998) 232 ITR 2 and CIT v. United Provinces Electric Supply Co. (2000) 244 ITR 764 for the proposition that the disputed amount could not be taxed. It was the case of the learned counsel that the facts of the case were identical with the facts of the case of CIT v. Smt. Vimla D. Sonwane (1994) 75 Taxman 335 (Bom). It was pleaded by him that in the Bombay case the Hon'ble High Court was pleased to decide the issue in favour of the assessee by holding that where right to receive rent was in jeopardy because of pendency of proceedings for acquisition of land in the court of law income from lease rent could not be taxed on accrual basis. For the same proposition the learned counsel also relied on the decision in the case of Addl. CIT v. Ganesh Das (1981) 129 ITR 467 (All). In order to support his view as regards non-accrual of the income, the learned counsel also placed reliance on two decisions rendered in the context of Managing Agency Commission. Finally the learned counsel supported his view by the Judgment in the case of Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 (SC) by arguing that the compensation which was pending for settlement before the highest court of the state had not acquired finality and thus there was no case for the revenue to put the rental income to tax. He further pointed out that the right of the assessee was only inchoate in the sense that it was not finally determined and was pending for litigation.

3.2 In the opposition the learned Departmental Representative contended that the assessee had filed suit for the vacation of the property as also for the compensation at the rate of Rs. 70,000 per month, for the period after the expiry of lease agreement. He contended -that this compensation comprised of the amount of rent also for the reason that the premises in dispute was in the occupation of the bank and the bank had sent the payment through cheques. He pointed out that the compensation of Rs. 70,000 per month included rent of Rs. 24,000 and odd which was in accordance with the agreement with the bank, though it had expired in the month of May, 1989 and the balance amount, was attributable to the damages as claimed by the assessee. He further pointed out that the assessing officer had taxed only the portion attributable to the rent at the rate of Rs. 24,000 and odd per month and not the balance of around Rs. 46,000 per month towards damages.

It was further pointed out by the learned Departmental Representative that the assessee was maintaining its accounts on mercantile system of account, as was evident from the order of the assessing officer itself, wherein a specific finding to this effect had been given. Following the mercantile system of accounting, the learned Departmental Representative pointed out that the income becomes taxable when the assessee acquires the right to receive same, irrespective of the fact that whether it was received or not. In his final submissions, the learned Departmental Representative supported the action of the first appellate authority.

3.3 In the rejoinder the learned counsel for the assessee submitted that in May, 1989 the agreement came to an end and under the terms of contract the assessee could not be said to have the right to receive rental income. He pointed out that once the matter was referred to the High Court, by way of filing suit, it was the court's discretion to grant the compensation, the quantum of which may be dependent upon the decision of the court.

3.4 We have considered the rival submissions in the light of the material placed before us and precedents relied upon. The only question that falls for our consideration is to decide whether the amount of Rs. 24,000 and odd per month, was taxable in the hands of the assessee or not when the lease deed had expired and the bank was still in the occupation of the same premises and had also sent the cheques towards rent to the assessee though these were not encashed. The first important thing agitated by both the sides is the method of accounting followed by the assessee. It is obvious that the revenue authorities had categorically recorded a finding that the assessee was following mercantile system of accounting. As against this, the claim of the assessee is that it was following hybrid system of accounting in the sense that the rent was accounted for on receipt basis in its account books. Attention of the learned counsel was drawn to the provisions of Companies Act and whereby it was mandatory for all the companies to follow the mercantile system of accounting. To this the learned counsel submitted that no doubt in accordance with the Companies Act, 1956 it was essential to maintain accounts on the mercantile system of accounting but that was not relevant for the purposes of Income Tax Act and if any contravention is done for the provisions of the Companies Act, at the most the Chartered Accountant could qualify the report and the same had no bearing on determination of the total income under the Income Tax Act.

3.5 Before going further, we shall consider the case laws relied upon by the learned counsel for the assessee.

3.5(i) In the case of Smt. Vimla D. Sonwane (supra) the assessee gave on lease two properties, Plot No. H1 at Rs. 9 lakhs per annum and Plot Nos. H2 and H3 at Rs. 6 lakhs per year. Both the lessees have filed suits for standard rent. The assessees therein included the actual receipts of rent under the head 'Income from other sources' in her returns of income and no books of account were maintained by her. Also mercantile system of accounting was not followed. The Income Tax Officer added the lease money in the total income of the assessee on accrual basis. The Hon'ble High Court reversed the action of the assessing officer by holding that the option regarding adoption of system of accounting was with the assessee and not with the Income Tax Department and if the assessee was not following mercantile system of accounting, the income could not be taxed on the basis of accrual. As against this, the facts in the present case are that it is not established positively that the assessee was not maintaining its accounts on mercantile system of accounting basis and that apart the cheques were received from the bank during the relevant assessment years though these were not encashed.

In the case of Ganesh Das (supra) the facts are found to be quite distinguishable because in that case when the arrears of rent beyond the stipulated lease period were received by the assessee and the assessing officer sought to tax the same in assessment year 1961-62, the assessee voluntarily revised its returns for the assessment years 1951-52 to 1957-58 in relation to this income. In the instant case the facts are more or less identical in the sense that arrears of rent were received for the period after the expiration of lease deed. As the assessee in that case had himself revised his returns for the relevant assessment years, including rental income, the facts of the Allahabad High Court case rather appear to be against the assessee because in the present case also the assessing officer is seeking to tax the rental income for the post expiry period of lease deed in the years to which these pertain.

3.5(ii) The next case on which the assessee has been placing reliance right from the stage of the assessing officer is that of the Hindustan Housing & Land Development Trust Ltd.s case (supra). In that case the Land Acquisition Officer awarded some compensation to the assessee, which was not acceptable to the assessee and the assessee being dissatisfied with the amount took the matter to the Arbitrator who fixed the amount of compensation at a higher figure, The assessing officer brought to tax the amount of enhanced compensation in the year when it was awarded though the State Government had filed appeal against the enhancement. The Income Tax Officer treated the amount of enhancement as liable to income-tax during the year on the basis that the income had accrued to the assessee on the date of the award. It was on these facts that the Hon'ble Supreme Court held that the amount of additional compensation did not accrue to the assessee and it was not taxable at that stage. In contrast, the facts of the present case are that a civil suit was filed by the assessee lodging its claim at a figure of Rs. 70,000 per month, (hereinafter referred to as the "A+") which was higher than the actual rent at Rs. 24,000 and odd per month. So the claim of the assessee for compensation was on account of two parts, viz. "A" being the rent and the part "+" representing damages over and above rent. So far as the part A is concerned, there is no dispute that the bank sent the cheques and the assessee received the same, though these were not encashed. It means in regard to part "A" there was no dispute. The only dispute is with regard to part "+" towards damages which the bank may or may not be ready to pay and to which the assessee cannot be said to have acquired any legal right to receive till the issue is finally decided. The Hon'ble Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) was dealing with the taxability of enhancement of compensation and not the original compensation, which was undisputably put to tax in the year of its receipt. Here also so far as part "A" is concerned, there is no dispute in the sense that the assessee had the right to receive the same and the bank was bound to pay that in view of the fact that the property under consideration was in the possession of the bank during the relevant assessment years and the bank had itself sent the cheques for the amount of rent. Thus, the dispute can be said to be surviving only so far as the balance amount of around Rs. 46,000 per month is concerned. Whether the assessee finally succeeds in vacating the property or not, whether the assessee succeeds in getting the total compensation ("A+") or not, in any case, it will not receive anything less than the agreed rent even if it pertains to period after the expiry of lease deed on the simple logic that the bank had been using the said property for the relevant assessment years and had regularly sent the cheques. It implies that to the extent of Rs. 24,000 and odd the bank had accepted the same. It is another matter that the assessee did not accept the cheques from the bank in order to strengthen its case for the vacation of the property. Be that as it may, we are of the considered opinion that the bank in all eventualities will have to pay the rent at the rate for which it had agreed to pay for the period under consideration although the lease deed had expired in May, 1989. It is also important to note that the Supreme Court authorities relied upon by the assessee viz., Hindustan Housing & Land Development Trust Ltd.'s case (supra) and Godhra Electricity Co. Ltd.'s case (supra) relate to only the taxability of "enhanced portion" and not original amount, on which there dispute.

3.5(iii) The Supreme Court, in the case of United Provinces Electric Supply Co. (supra) was confronted with the situation in which the assessee had received the compensation as the claim for enhancement was pending. The case of the assessee was that the balancing charge under section 41(2) of Income Tax Act, 1961 was not attracted on the receipt of compensation because of the fact that the proceedings for the enhancement had not attained finality. It was held by their Lordships that the pendency of arbitration proceedings for determination of enhancement of compensation would not affect the liability and the provisions of section 41(2) were held to be applicable in the year of receipt of original compensation. It was held that if any additional amount was received in subsequent year, that would become business income in that later year. This judgment brings us closer to the situation that the taxability of the definite income cannot be postponed till the dispute regarding enhanced sum is finally settled.

3.6 We are not on the issue as to which method of accounting the assessee was following, and whether rightly or not and what implications will follow if the mercantile method of accounting is not followed. Be that as it may, it is assumed that the assessee was following mercantile system of accounting as observed by the revenue authorities then the assessee would become liable to tax when he acquires the right to receive the income and if, on the other hand, if cash system is presumed to have been followed in respect of the rent, then the event of taxability will arise on its receipt. We have already held in the preceding paragraph, that the assessee had acquired, the right to receive part "A", being the rent, in the relevant years itself. As regards the receipt of rent after expiry of lease is concerned, it is to be noted that the bank sent the payment of rent through cheques to the assessee, which were received by it though not encashed. The Hon'ble Supreme Court in the case of CIT v. Ogale Glass Works (1954) 25 ITR 529 held that when the payment is received by cheque, the receipt is at the time when the cheque is delivered and not when it is encashed.

This leads us to the conclusion that under both the situations i.e., irrespective of the method of accounting followed by the assessee, the assessee is liable to tax in respect of the rent of Rs. 24,000 and odd per month in the years under consideration. We, therefore, uphold the order of the Commissioner (Appeals) on this issue.

4. The next ground for assessment year 1991-92 relates to disallowance to the extent of 1/5th out of car maintenance expenses of Rs. 1,01,331. The assessing officer while making assessment for the assessment year 1991-92 found that the expenses claimed by the assessee on account of user of cars for business purposes were excessive. Relying on the possibility of personal user of cars by the Directors, he disallowed 1/3rd of total expenses. The learned Commissioner (Appeals) reduced the disallowance to 1/5th.

5. In view of the decision of the Special Bench in the case of Daks Copy Services (P) Ltd. v. IT0 (1989) 30 ITD 223 (Bom), we are of the considered view that in the case of company-assessee no disallowance out of car expenses can be attributed to the personal user by the Directors.

6. In the result, the appeal for assessment year 1990-91 is dismissed and for assessment year 1991-92 is partly allowed.